Registre de Commerce et des Sociétés
B22232 - 1140093075
déposé le 05/06/2014
MENTION
Nom de la société : ESPIRITO SANTO FINANCIAL GROUP S.A.
Siège social : 22/24, Boulevard Royal, L-2449 Luxembourg
N° du Registre de Commerce : B 22 232
N° CDO : 521 Le bilan consolidé au : 31.12.2013
ont été déposés au Registre de Commerce et des Sociétés.
Pour mention aux fins de publication au Mémorial, Recueil Spécial des Sociétés et Associations.
Luxembourg, le 30 mai 2014
SG AUDIT SARL
Registre de Commerce et des Sociétés
B22232 - 1140093075
enregistré et déposé le 05/06/2014
ESPÍRITO SANTO FINANCIAL GROUP S.A.
CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013
22 - 24 Boulevard Royal
L-2449 Luxembourg RCS: Luxembourg B22.232
Report of the Réviseur d'Entreprises agréé
Consolidated Income Statement for the years ended 31 December 2013 and 2012
Consolidated Statement of Comprehensive Income for the years ended 31 December 2013 and 2012 Consolidated Balance Sheet as at 31 December 2013 and 2012
Statement of changes in Consolidated Equity for the years ended 31 December 2013 and 2012 Consolidated Cash Flow Statement for the years ended 31 December 2013 and 2012
Notes to the Consolidated Financial Statements as at 31 December 2013 and 2012
F-2
F-4 F-5 F-6 F-7
MINA
KPMG Luxembourg S.àr.l. Telephone +352 22 51 51 1
9, allée Schelfer Fax 4352 22 Bi 71
L-2520 Luxembourg Internet www kpma.lu Email info@kpmg.lu
To the Shareholders of
Espirito Santo Financial Group S.A. 22/24 boulevard Royal
L-2449 Luxembourg
REPORT OF THE REVISEUR D’ENTREPRISES AGREE
Report on the consolidated financial statements
We have audited the accompanying consolidated financial statements of Espírito Santo Financial Group SA. which comprise the consolidated statements of financial position as at December 31, 2013 and the consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement for the year then ended, and a summary of significant accounting policies and other explanatory information,
Board of Director 's responsibility for the consolidated financial statements
The Board of Directors is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union, and for such internal control as the Board of Directors determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Responsibility af the Réviseur d'Entreprises agréé
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing as adopted for Luxembourg by the Commission de Surveillance du Secteur Financier, Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the judgement of the Réviseur d'Entreprises agréé, including the assessment of the risks of material
ENT.001
misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the Réviseur d'Entreprises agréé considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Board of Directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
XPHG Luxemboug Sarl. 3 Lwenbarg givate Emited company IVA LU 2469277
and a member ol the KAMAG getraut of dote vk membor fms Catal 12.502 €
all&ated with KPIMG Inlensatienal Corperate (KPMG bilernavonat h RCS Levermd seet B [40139 a Swiss entity
RIMA
Opinion
In our opinion, the consolidated financial statements give a true and fair view of the consolidated financial position of Espirito Santo Financial Group S.A. as of December 31, 2013, and of its consolidated financial performance and its consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union.
Emphasis of Matter
Without qualifying our opinion included in the previous paragraph, we draw attention to Note 41 and Note 47 of the annual accounts, which describe the euro 700 million provision in relation with the subscription by ESFG customers of debt instruments issued by Espírito Santo International S.A. (‘ESI’). The Board of Directors of ESFG believes that the reimbursement of the debt instruments issued by ESI will be possible through implementation of the deleverage program, the support of ESI shareholders, its capacity to obtain or renew credit lines in the financial markets and, additionaily, through the support from ESFG.
Report on other legal and regulatory requirements
The consolidated management report, which is the responsibility of the Board of Directors, is consistent with the consolidated financia! statements. The accompanying Corporate Governance Statement on pages 30 to 40 which is the responsibility of the Board of Directors, is consistent with the consolidated financial statements and includes the information required by the law.
Luxembourg, April 28, 2014 KPMG Luxembourg S.à r.l. Cabinet de révision agréé
F, Rouault
SW CON
ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED INCOME STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2013 AND 2012
Noles 31,12.2013 31.12.2012 (in thousands of euro) Interest and simiar income 5 3 629 256 4007 681 Tnierest expense and similar charges 5 2536 761 2 832 460 Net Interest income 1092 495 1265221 Dividend income 583094 73 167 Fee and commission income 6 926 760 +035 146 Fee and commission expenses 6 (203 628) (185 532) Wet (losses) from fmancal assets and fmancal kabilities at fair value through profit or loss 7 (294 970) (54762) Nel gains from avaiable-for-sale financial assets 8 451 649 605 568 Net (losses) from foreign exchange differences 9 (2688) (18 369) Net (losses) from the sale of other assets 10 (67063) (42 513) Insurance earned prernums net of reinsurance E 694 668 407 632 Other operating rrome 12 74 843 458 997 Operaling income 2 730 460 3 544 435 StafT costs I3 692 734 777 707 General and administrative expenses 15 518 076 502 760 Clams incurred net of remsurance 16 483218 Gta Change in technical reserves net of reinsurance 17 153231 (336 660) Insurance commssions 18 (152256) 39 256 Depreciation and amortisation 30 and 32 119 458 145 779 Provisions nei of reversals A} 695651 57251 Loans impairment net of reversals and recoveries 26 1005293 794 291 Tmpainnent on other fnancal assets net of reversals 24, 25 and 27 109 978 106 737 Impaiment on other assets net of reversals 29, 30, 32 and 35 323877 223070 Other operaling expenses 12 157 969 276 990 Operating expenses 4107 325 3 219 124 Gains on disposal of mvestments m subsidares and associales land 55 3 74 050 Gains arsing on business combinations achieved m stages land 55 - 87213 Share of profit of associates 33 8823 4756 (Loss) / profit before Income tax (1 368 0-43) 491 390 Income fax Current tax 42 157 432 152 159 Deferred tax 42 (321 625) (41 157) (164 193) 111 002 (Loss) / profit from continuing operations (1 203 85D) 380388 Disconlinued operations 29 (30 766) (8684) (T.oss)/ profit forthe year (1 234 646) 371 704 — AltributabIe to equity holders ofthe Company (864 031) 313 633 Attributable to non-controlling interest 46. (370 615) 58 071 (1234 646) 371 704 Eammgs per share of profit attrbutabie to the equity holders of the Company. Bast (m Euro) 19 (4.23) I.86 Diluted (n Euro} 19 (423) 1.86 Earnings per share of profit from cantang operalions attributable to the equity holders of the Company: Basic (in Euro) I9 (4.19) 1.91 Diluted (in Euro) 19 (4.19) 1.91
The following notes form an integral part of these consolidated financial statements.
F-2
ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEARS ENDED 31 DECEMBER 2013 AND 2012
(Loss) / profit for the year Altributable to equity holders of the company Attributable to non-conirollng interest
Other comprehensive income, net of income tax
Items that will not be reclassified to the income statement Acluarial gains and (losses) from defined benefit obligation (Note 14) Income taxes on actuarial gains and losses from defined benefit obligation
Total items that will not be reclassificd to the income statement
Items that may be reclassified subsequently to the income statement Exchange differences on translating foreign operations
Income taxes on exchange differences on translating foreign operations Other comprehensive income from associates
Fair value reserve (available-for-sale financial assets): Net change in fair value Net amount transferred to the income statement Deferred taxes on gains / losses of available-for-sale financial assets
Total items that may be reclassified subsequently to the income statement
Other comprehensive (loss) / income for the year, net of income tax
Total comprehensive (loss) / income for the year
Attributable fo equity holders ofthe Company Attributable to nou-controlling interest
31.12.2013
31.12.2012
(in thousands of euro)
(864 031) (370 615)
(1234 646)
(107 130) 1380
(105 750) (80274)
(6663) 1975
( 84 962)
175 317 (341219) 42 699
(123203) (208 165)
(313 915)
(1 548 561)
(945 085) (603 476)
(1 548 561)
313 633 58 071
371 704
( 189 479) 18 597
(170 882) ( 58 581)
3247 € 10 009)
(65 343)
1274 898 ( 506 250) ( 129.070)
639 578 574 235
403 353
775 057
445 317 329 740
775 057
E
The following notes form an integral part of these consolidated financial statements.
F-3
ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2013 AND 2012
Notes 31.12.2013 31.12.2012 (in thousands of euro) Assels Cash and deposits at central banks 20 I 828 674 1444 83t Deposits with banks 21 1148 934 1 126 853 Financial assels held for trading 22 2488 465 3981 845 Other financial assets at fair value through profit or loss 23 3584 118 2603463 Available-for-sale financial assets 24 8 929 778 11 (41 235 Loans and advances to banks 25 4 827 190 4543 247 Loans and advances to customers 26 49 270 667 50 692 878 Held-to-maturity investments 27 1672 068 1119 (H7 Derivatives for risk management purposes 28 363 391 516 520 Non-current assets held for sale 29 3567011 3 280 [85 Property and equipment 30 974229 982 617 Investment properties 31 719 422 197 323 Intangible assets 32 603 269 703 210 Investments in associates 33 606 475 640 614 "Fechnical reserves of reinsurance ceded 34 76 899 70173 Current income fax assels 40 967 28 811 Deferred income tax assets 42 1064583 160 953 Other assets 35 3 097 613 3234655 Total assets 84 849 651 87 574 060 Liabilities Deposits from central banks 36 9772 24 10 941 325 Financial liabilities held for trading 22 1336 768 2124225 Deposits from banks 31 5033 494 5065 980 Due to customers 38 38 093 807 35 625 474 Debt securities issued 39 12.615 208 15 952 870 Derivatives for risk management purposes 28 130 710 125 195 Investment contracts 40 4473921 3 844 020 Non-current liabilities held for sale 29 153 580 175 945 Provisions ql 917 020 255 601 Technical reserves of drect insurance 34 2643156 2 488 328 Current income tax Habihties 122313 253 406 Deferred income tax liabikties 42 96972 154 736 Subordinated debt 43 1403 138 1176482 Other Habiities 44 1345 833 1 268 442 Total liabillfles ‘73 138 214 79 452 033 Equity Share capital 45 207 075 207 075 Treasury shares 45 (3459) (35 985) Share premium 45 884 456 884 456 Preference shares 45 51 367 55 978 Other equity components 45 26 418 58 100 Capital reserve not available for distribution 45 700 970 700 970 Fair value reserve 45 (3208) 23571 Other reserves and retained earnings 45 284 548 (10282) (Loss) / profit for the year attributable to equity holders of the Company (864 031) 313 633 —- Total equity attributable to equity holders of the Company 1284136 2199 736 Non- controling interest 46 5427 301 5922231 Total equity 6 711437 B 122 027 Total equity and liabilities 84 849 651 87 574 060
The following notes form an integral part of these consolidated financial statements,
F-4
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ESPÍRITO SANTO FINANCIAL GROUP SA
CONSOLIDATED CAST FLOW STATEMENT FOR THE YEARS ENDED 31 DECEMBER 2013 AND 2012
Cash flows from operating activities
Notes 31.12.2013
31.12.2012
(in ihousands of euro)
Interest and similar income received 3410463 4117818 Interest expense and similar charges paid (2 298 066) (2 859 407) Fees and commission received 928 480 1 40 330 Fees and commission paid (60519) (232 625) Insurance premiums 698 064 455 603 Claims paid (501 H8) (629 661} Medical services income received 13816 338 201 Medical services expenses paid (25712) ( 196 622) Recoveries on loans previously written off 21061 21900 Contributions to pension fund ( 103 806) (86 410) Cash payments lo employees and suppliers (1127 514) (1230 679) Net cash from operating profits before changes in operaling asseis and liabilities 978 261 738 453 Deposits with central banks (1321 520) (2 836 014) Financial assels at fair value through profit and loss (593 867) 1336341 Loans and advances to banks 284 582 746 249 Deposits from banks (23 670) (1247 339) Loans and advances lo customers (250761) (526 961) Due to customers 2 445 089 658 356 Derivatives for risk management purposes 63 281 226 558 Oher operational assels and iabifitres (23 286) ( 482 065) Net cash [rom operating aclivities before income lax 1058 109 (1 386 422) Income laxes paid (290237) (51189) Net cash from operating activities 767 872 (1 437 611) Cash flows from investing activities Purchase of subsidianes and associales (44982) (367 428) Sale of subsidiaries and associates 80 079 202 762 Dividends received 64617 74217 Purchase of financial assels available for sale (55 955 501) (70321 809) Sale of financial asse ls available for sale 58 759 065 73 794 572 Held to maturity invesiments ( 541 690} 681 033 issued insurance investment contracis 424305 482 542 Purchase of tangible and intanpble assels and investment properties (183 108) (544 684) Sale of tangible and intangible assets and invesinvenl properties 26 422 14 068 Nel cash (used in) / from investing activities 2 629237 4013273 Cash flows from financing activities Capital increase - 493 584 Repurchase of preference shares (2757) (17627) Debi securities issued 6615714 td 112 540 Debi securities paid (9 842 434) (17 669 609) Subordinated debt issued 750 400 - Subordinated debt paid (510515) (234 386) Treasury stock 38 639 (15222) Non-contrcliing interest on capital increase of subsidiaries E 755511 Interest on other equity instruments (2191) (1864) Dividend paid oa ordinary shares (167) (6329) Dividend paid an preferred shares (10217) (15213) Net cash from financing activities (2 965 034) {2 598 615) Effect of exchange rate changes on cash and cash equivalents (74 554) (27291) Net increase in cash and cash equivalents 357 521 (50 244) Cash and cash equivalents ai beginning ol ihe year U 2 123 505 1950 923 Cash and cash equivalents at end ofthe year 2481 026 2123505 Cash acquired on change In scope of consolidation 182821 357 521 (50 244) Cash and cash equivalent includes: Cash 20 289 349 304 409 Deposits with Central Banks 20 1539325 1140422 Mandalory deposits with Central Banks 20 (496 582) (448 179} Deposits with banks 2l 1148934 1126853 Total 2481 026 2123 505
The following notes form an integral part of these consolidated financial statements.
F-6
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 (Amomnts expressed in thousands of euro, except when indicated)
NOTE 1 - ACTIVITY AND GROUP STRUCTURE
Espírito Santo Financial Group S.A. (ESFG or the Group) is a limited liability company headquartered in Luxembourg, incorporated under Luxembourg law on 28 November 1984, and is the holding company of the banking and financial activities of the Espírito Santo Group (GES) located in Luxembourg, Portugal and around the world. Most of the non financial activities of the Espírito Santo Group, including real estate, tourism and other activities are managed by Rio Forte Investments S.A., a limited liability company headquartered in Luxembourg and a fully owned subsidiary of E.S. International S.A. (ESD, a company headquartered in Luxembourg.
In December 2013, Espirito Santo Irmáos S.A., a fully-owned subsidiary (direct and indirect) of Rio Forte Investments S.A., acquired from EST its participation in ESFG. Consequently, Rio Forte Investments S.A., became the indirect holder of the interest of the Espírito Santo Group in ESFG, The terms and conditions of the agreement established between ES Irmãos and ESI were met only during the month of January 2014, therefore control over ESFG was obtained by Rioforte only in 2014, As a result, from 1 January 2014, ESFG will be fully consolidated by Rio Forte.
The ultimate parent company of ESFG remains Espirito Santo Control S.A. (ESC), a company headquartered in Luxembourg, direct parent company of ESI.
Consolidated financial statements of ESFG are available at the Company's registered office at 22-24 Boulevard Royal in Luxembourg. There are no audited consolidated financial statements at the level of ESI or ESC.
Through its subsidiaries, the Group (ESFG and its subsidiaries) engages in a broad range of financial activities primarily through Banco Espírito Santo S.A. and its insurance companies: Companhia de Seguros Tranquilidade S.A., BES Vida, S.A. and 'T- Vida, Companhia de Seguros S.A.. Its operations abroad complement its Portuguese activities.
ESFG is listed on the Luxembourg, London and Lisbon Stock Exchanges.
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The following table describes the main activity of each of the Group's subsidiaries and associates as at 31 December 2013
and 31 December 2012:
Subsidiaries
Advencecare -Qestlo de Serviços de Saúde, SA Amen Bank (or Commerce and Investment Stock Cenpeny (a)
AOC Patimome
Arrábida - Fundo Especial de Investimento Imobiliário Fechado
Adantic Ventures Corporabon
Atlante Ventures M Corporation
vistes, SOPS, SA
Barro Esplito Santo Angola, SARL Banco Espiro Santo de Investimento, S.A. Banco Espírito Santo do Oriente, SA Barco Espirito Santo dos Açores, SA
Banco Esplito Santo Nonh America Capital Limited LiebiEty Co.
Banco Espinlo Sento, 8 A (0)
Barco Espirito Santo Cabo Verde
Bark Espirito Santo Intemational, Ltd. Banque Esplito Sante et de la Vénétie, S.A. Banque Privée Espirito Sento, SA BES Achivos Financeros, Ltda
BES Africo, SGPS, SA
BES Beteiigungs, GmbH
BES Finance, Ltd
BES Investimento do Bras, SAL
DES Vida, Companhia de Seguros, S.A. R Invert Lida
R Consult Pacicrpagürs Lida
BESA Vaforisação - Fundo de Investimento Imebiiario Fechado
BES Secunüres do Brand SA
BESAACTIF - Sociedade Ca stora de Fundos de Investimento S.A. BESAACTIT Pensoes - Sociedade Oestora de fundos de Pensões, SA
BESPAR, SGPS, S.A.
BEST -Banto Electrónico de Serviço Total, S.A
BIC Intemational Bank Ltd.
Capital Mais - Assessona Emancera, SA Caravela Balanced Fund
Caravela Defensive Fund
Clear Capital Group Lerited
Clear Infa-Anahtcs Private Ltd
COMINVEST - Sociedade de Grilio e Investimento Imobiürio S A
Espinto Sardo Investrtent
ES - ARRENDAMENTO
ES Bankers (Dubai) Lerited
ES Financial Services, Inc.
ES Recuperação de Crécito, ACE
Espirito Sento Secuntes India Private Limited
ES Tech Ventures, SOPS SA
ES Ventures-. Sociedade de Capital de Risco, SA
ESAF Esperia Santo Actives Financeiras, SP S, SA. ESAF - Espio Santo Participações Intemacionais SOPS, SA ESAF - Intemational Distritutors Associates, Lid.
ESFO International Ltd
ESGEST - Esp. Santo Gestão Instalações, Aprov.e Com, SA
Espirilo Santo Activos Financieros, SA. ES Investment Advisers, Ine.
Espirito Santo Bank {Panama}, S.A. Esguile Santo Bank, tne.
Espirito Santo Capital- Sociedade de Capital de Risco, SA
Espirito Santo Concessões, SOPS, SA Escencessions Spain Holding BV
ES Conceastona En(emationz] Holding, BV ES Concessions Latam Holding BY ES Consultancy (Singapore) Ltd.
Espinta Santo Contact Center, Gestão de Cal Centers, SA.
Espirito Santo e Comercial de lisboa Inc.
Espirito Sardo Financial (Portugal), SOPS, SA.
Espinte Santo Emancitte, SA Espirito Santo Fundo de Pens Ses, SA
Espinto Sanlo Fundos de Investimentos Imobibásos, SA. Espinito Santo Fundos de Investimentos Mobiidinos, SA
Espirito Santo Gestão de Patrendrios, SA. ESEkurebená
Espirito Santo Geshôn S.A. 5 GILC. Espirito Santo Informatica, ACE
Espirito Santo Intemational Management, SA
Espiite Santo Investmrct Holding Lenstad Espirito Santo Investimentos S.A.
31.12.2013 31.12.2012 Voting Economie Voting Economic
Actnitr Location inferest interest interest Interest Managed care. Portugal 51005 Jima 510% EI Comercial banking Libya pr DË 400% 10954 Assets management France LOO 5854 ipo mg 364% Real Estate Fund Portugal 100025 26.136 - - Hoking company USA 10005 18158 100.036 2i Holding company USA - - 100.015 205% Holding company Portugel 100025 27446 100.0%. 274% Commercial banting Angola 53445 153% HE 1438 Invest ent barking Portugal 100.026. 2748 100.036. DÉI Commercial banking Macao 55316 ITA Em 273% Commercial banking Portugal 3155s M 536 37588 (37% Finanemng vehicle USA 100035 as 100.0%) DÉI Commercial banking Portugal 38315 274% 367 27416 Commercial banking Cape Green 100.025. 27456 100 ms 274% Commercial banking Cayman Islands 1000 214% 100.055 Bam Commercial banking France 815% 36515 ELS 56516 Asset mensgement Swmtredand 100.076. [unii 100.096 100 mé Asset menagement Eram 100.03 233% 100.074 325 Holding company Portugal 100.04 TAN 100.0% 214% Hotésng company Germany 100.085 274% 100.0% 214% Fmareing vehicle Caymen islands 100.0% 214% 100.0% HET Investment banking Bram Sos 255 E0095 2186 Insurance Portugel 100.076 274% 100.0% 2145 Services provider Brazil - - 100.0% 214 Services provider Bra - - 100055 HE) Assel nanagement- Real Estate fonds Angola 100.058 1335 - - Brokerage house Brazi 100016 215*$ 100.0% 219% Asset management - Mutual finds Angola 97.0% 15.155 B; 9t5 174% Asselgianagemen! - Pensions funds Angola 97.04 18.1% 9100. 1435 Holding company Portugal 7185 T3658 7344 pr Intemel banking Portugal 35658 27156 150% inn Commercial banking Cayman Islands 100.074 2145 100.0% 2144 Advisory services Portugal i00 Ot 24308 100014 246% Investment Fund. Linsnbourg He I5.1t6 55085 15025 Investment Fund Luxembourg WT 274% 9925) 21% Holding company ‘United Kingdom - - 100.05 18.74 Provides analytics support (o UK research India 100.015 214% 100.035 18.744 Realectate Portugal 100.023 niu 490% 134% Services provider Poland 100.0% 2140 [00.04 Mats Investment Fund Portugal ID0. (a WAM 100.053. HMS Commercial banking Dubai 95056 95016 950 DIS Brokerages house USA 100.046 274 100.045 274% Debi collection Portugal 100.085 272% 100.075 21.155 Brokerage house India 75.0% 10615 75.034 20.5% Holding company Portugal 195.045 274% 10040; 2145 Venture capital Portugal 100.098 274% 100.085 274% Holding company Postugel sous DAT 90.058. Hih HokEng company Portugal 100096 KK 100.0% 21656 Disiibution company British Virgin Islands 100.925 245 100.055 21858 Financing vehicle Cayman Islands 91088 LR 100.033 100456 Shared services Portugal 102.095 27456 100.085 21456 Asse management Spam 100055 261% 106056 26958 Consultancy USA Tome 274% 100455 274% Commercial banking Panama IGH 100.096 100.058 lon ote Commercial banking USA 100058 FIEL 100054. 2TA% Venture capilal Permgal ibid 274% idee HAM Holding company Pertugel 7.756 H 196% Hokimg company Holand Mou - - Hoking company —Hefand 100.04 109 04. 15415— Holdme company Roland - - 100.055. 19.6% Consutancy Singapore - - 100044 1006 Cal center services Portugal 100.058 LD 100.06 67.716 Represenlahon office USA - - 10088. 274% Hotémg company Portugal 100036 100918 100.075 1000 Holding company Linembourg 109.025. (ale? 100.045. Looe Asset management ~ Pensions funds Portugal 100.035 AH 100.025 246% Asset management - Real Estate funds Portugal 100.056 458 [00.084 216% Assetnenagement- Mutual funds Portugal 100.056 248 100035 Ha Asset oanagemenl Portugal 100.025 HIR 100.0% 246% Investment Fund Luxembourg - D 528% Hds Asset mangement Spam 100.056 26.1% 100.0% 26.0% Shared services Portugal 100.006 385% 100.058 388% Asset management. Mutual funds Lunembourg, DEM ANS 9954 246% Hoktng compeny United Kingdon 100 056 274% 68458 13:756 Holdng company Brani 100.035 274% 100.058 21
F-7
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amounts expressed in thousands of euro, except when indicated)
Subsidiaries
31.12.2013 31.122012 Vols Economie Voting Economle Actirity Location Interest interest Interest Interest. Espírito Santo Investments PLC Brokerage house Ireland 1005 2214 1m 08s NAM Espirito Santo Pensiones, SGF FP, S.A Assels management - Pensions funds Span 10405 2515 100.057 250% ES Plano Dinâmico Investment Ford Portugal 9731 26356 cri] 20584 ES Rerxkriento Dinâmico Invertmeni Fund Portugal - - 63554 155% Espitita Santo Preciação de Serviços, ACE Shared services Portugal 99015 324 100.0834 355 Espirito Sarto Representações, Ltda Repres entation office Bral ak? 2744 100058 2145 Espirito Santo Servicios, SA Insurance Span 100.0% 274% 100016 213% Espirito Santo Serviços Financeios Distribuição de Titulos c YM, SA Brokerage house Brazl 1909055 219% Ha BETS Espirito Santo, PLC Non Sak Granite company Deland 100.0% 214% 100% 21398 Esprito Santo Vanguarda, SL Services provider Spi 100.0% DAM 100.0 213% Espisto Sanlo Wealth Europe SA Asset management Luxembourg 100.098 100.055 100.055 100.078 ESS] Comunicações, SOPS, S.A Holding company Portugal - - 100058 274% ESS] Invesimentes, SGPS, SA Holding company Portugal 100.0% 2745 100 D54 274% ESSI, SOPS, S.A. Holding company Portugal 100.076 Bat 109,0% 274% Esunéiica- Prestação de Cuidados Médicos, SA Heath care Portugal 100.056 100.054 100.040 100486 Execution Holding Limited Holding company United Kingdom - - 10006 18258 Execution Noble & Company Limited Advisory on investments United Kingdom 100,05 2148 100.045 187% Execution Noble (Heng Keng) Limieg Broker Dealer China 100.01 274% 100% 187% Execution Noble Holdings LEC Holding Company USA - - 100.036 1874 Execution Noble Liritad Broker Dealer United Kingdom 100.076 274% 100.004 1.85 Execution Noble Research limited No setivity United Kingdom 100.0% 214% 100.0% 18.74 FI Mutümercado Treasury Investment Fund Bnn 100.06 21558 100.0% 2195 Fundo BES Absolute Retum Investment Fund Brari 988% 21314 49.85 nm Bes Fundo de Investimento Mulimercado Moderado Investment Fund Brant 100 5 215% 655% 153% Fines Ocente Investment Fund Portugal 100.058 Mats Io mb 274% Fitoteel VIS A. Ventures Turism Development Portugal 16.056 M H H Fundo de Investimento Imobihário Fechado Corpus Christ Investment Fund Portugal 100.074 Mou. 9115 91198 Fundo de Capital de Risco - HES PME Capital Growth Venture capHal fond Portugal 100.058 274% 1005 274% Fundo de Capital de Risco - ES Ventures ll Venture capital fond Portugal 65058 (ORK 653% Tate Funde de Capital de Risco - ES Ventures DL Venture capital bad Portugal 60095 167% 615% 20.8% Fundo FER PME / BES Venture capial fund Portugal 53.135 151% 5510 151% Funds de Gestlo de Patrimonio Inotibina - FUNGEPI - BES Real Estate Fund Portugal AECH 16.54 $138 n5 Findo de Qestio de Patrimonio Imobliâria -FUNGEPI -BES IL Real Estele Fund Portugal 933% 261" ils 22208. Fundo de Grslão de Patrimonio Imobdiurio Real Estate Fund Portugal 973% 26195 913% 26.5% Oespac Parbepações, Ltda Holding company Brand Jm 115% 10065 ALPS Inbassai Participações, SA Hoidng company Braz 109.075 AV - - Triogesfào — Fundo de Investimento Imobiliário Fechado Investment Fond Portugal 100.0% ^ 274% - - TMOINVESTIMENTO -Fundo de Investimento Inobisirio Fechado Lovestment Fund Portugal 100008 274% - - IMOPRIME - Fundo de Investimento Tao bio Fechado Investment Fond Portugal 753% 35 455% diin Invesfundo VII — Fundo de Investmenlo Imobeiine Fechado Investment Fond Portugal 95.048 263% - - KeySpace Hungary Kft ReaLestele Himgary - - 50 510% Lies Investimentos Imobikários, Lida ReaLeslsle Brawl 100.0% 2744 - - Lusitania Capital 5 À PT de CV, SOFOM, ENR Holding Company Merco 100638 inm - - Mangnan Gestion S-A- Assetkfenagenent France 100095 555% lots 355% Noble Advisory India Private Lid Provides analytics support (o Group rescerch India 100.028 27455 CET ETS Noble Financial Holding s Larned Holding Company United Kingdom - - LA BTE Noble Fund Advisers Limited Fund management activites United Kingdon - - 100 08. 1&5 Noble Group Holdings Leniied Holding Company Man Island ~ - 190644 186 Noble Group Limited Holding Company United Kingdom - - ots 185055 Noble Venture Finance General Partner Limited Genaral partner For find Jersey Islands - - 10008 187% OBLOG Censuiting SA Software development Portugal 6665 183% 655% 124 Orey Reabilitação Crbena Investment Fund Portugal 73% 212% 13% 211058 BESV Courage SA Investment company France 100.046 3655 $9904 55.196 Pasu- Sociedade Urspessoal, SOPS Holding company Portugal 190.07 214% 1s VA PARTIRAN SGPS,SA Holding company Portugal 100.035 [00.08% [600% 100.073 Praça do Marquis - Serviços AudEares, SA. Realestate Portugal 109.06 274% IA 274% Preiss Capital - Fundo de Investimento brobiisrio Fechado Investment Fund Portugal 190.0445 174% - - Rightkaur SAL Services provider Portugal ioo Tu - - Quinta dos Cénegos- Sociedade Imobiliária SA Realestate Portugal 100.0 412% 100485 412% SEGUROS LOGO SA Insurance Portugal Mom 100.085 HO 100.095 SES Iberia SA Asset management Span D 13.745 30086 1375 SLMB ~ Secictt Lyonnaise de Marchands de Biens Realestate Trance sa 35555 1986 564% Soriité Civile Immobiitre du 45 Avenue Georges Mandel Realestate France 100058. 3906 100-084 499% Tegide Properties, Ine Realestate USA oo 25 100.086 274% TRANQUILIDADE - Companhia de Seguros Tranquikdade SA Insurance Portugal oes M D 10008 100.055 Tranquilidade CAS (Angola) Insurance Angola 20% DE 40086 49094 Tranquilidade Moçambique Companhia de Seguros, S.A. Insurance Morambique 106.0436 10.045 100058 ipo. 05 Tranquilidade Moganbique Companhia de Seguros Vida SA Insurance Mozambique Hm [Dun 100008 100075 —T-VIDA, Companhia de Siguron SA. Insurance Portugal - As 100.075 100.086, MOD. UCH Investimentos Imobikários e Hotelenos, Ltda Real-estele Brad 100 036 2746 - = TCS Participações e Investimentos, Lida Realestate Brazil Lem) AK - - URI Invesinentos TmobiXirior, Ltda Realestate Bram 100.054 DAS - -
F-8
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amonnts expressed in thousands of euro, except when indicated)
Assotiales
Adepa Gobal Services
Advance Ciclone Systems, SA
Ascend Douro ~ Estradas do Douro Interior, SA. Apolo Films, SL.
Ascend Group, SP S, SA.
Ascend: Pinhal Interior - Estradas do Pinhal Inlecer S.A Consecionana Autopista Perole-Kelepa, SA CV Autovia de los Vredes S.A.
Banco Dese Tre Venere, Spa
BES, Companhia de Seguros, SA
BIO-GENESIS
BRA Interrzcional SA
Coporgest, SA
Coreworks Proj Circuito Sist, Flect, SA
Dessa Investments SA,
Domática - Bleclrônica e Informática, SA
2BCapilal, SA.
2BCepilal Luxemburg SCA SICAR
2B Capital Luxemburg Genere Partners Seri (2)
Édenred Portugal SA
Empark-Aparcardentos y Servicios, 5 A-
ENKROIT SA
ESFGUR - Emprese de Segurança SA
Espinto Santo Intemational Asset Management Ltd. Espaito Santa Saúde SGPS, SA
Ewop Asistans- Comp. Portuguesa Seguros Assistência SA SCA Mandel Partners
Espirito Santo Venfures Inovação é InlemacionaEraczo Findo Bem Comum - Fundo de Capital de Risco
Fundo Espirito Santo IBERIAT
Global Active - Gestão Part Soc, SOPS, SA
Coupe CFCA SAS
HLC -Centras de Cogerazao, S A
Kar Leasing Algeria SPA
TMOCRESCENTE - Fundo de Investenento Inetitétio Fechado (a) LOCARENT - Companhia Portuguesa de Aluguer de Viaturas, SA MCOZ- Sociedade Gestora de Fundos des Investimento Mebihüro SA MMCI - Multimédia SA
Mobde World - Comunicações S.A.
Mom Banco SA.
Multipessoal Recursos Humanos - SOPS, SA Multrsave Photonics, SA.
Nanm, SA
Nutrigreen, SA
Oulaystems SA
Palexpo - Enagem Empresarial, S.A. (Formerly Costinovados) Poksh Hotel Capital SP
Frosport-Com Desportivas, SA
RODI SINKS & IDEAS, SA
SalgarInvertments SL
Sousacamp, SOPS, SA
Synergy industry and technology S-A.
TLC 2 - Sohições Intagrades de Telecomnicaçães, SA UNICRE - Ínshihrição Frnaneega de Crédito, SA (b) Watson Brown HSM Limited
WindpartLda
Yedeeams - Informatica, SA
Yoon Serviços, S.A (fomely PT Prime Tradecom)
Artiritr
Find adeaistrationr
Treatment, eEnination of inert residues
Molonray concession Entertainment
Motorway concession Molotway concession Motorway concession Motoraay concession Commercial banking, Insurance
Holding compmy FateriEmment
Holding company
TT Services
Holding company
TT Services
Venture capital
Venture capital
Fund management activities Services provider Management of parting slots Water management and treatment Security
Holding company
Hong compeny Insurance
Project finence
Venture capital Fund Venture capital Bad Venture capital fund Holding company
Holdeng company
Services provider
Leasing
Investment Fund
Renting
Investment Fund
Holding company Telecommmication Commercial banking Hosting company
IT Senices
Production of Semicenducters Services provider
IT Services
Furniture manufacture Services provider
Sporting goods bracing Mett ndustry
Services provider
Holding company
Heldaug company Telecommunication Financial ere dif institution Mechanochesoistry company Holding company
TT Services
Management of aisect portals
Portugal Portugal Luxembourg, Portugal Brazil Linembourg Lutnbeug Postutal Spen Portugal Portugal British Virgin Islands Portugal Pertugal France Portugal Portugal Portugal Portugal France Portugal Algeria Portugal Portugal Portugal Portugal Portugal Mozambique Portugal Postugal Portugal Portugal Porhagai Portugal Poland Span Portugal Spam Portugal Spen Portugal Portugal United Kingdom Portugal Portugal Portugal
(2) Akhough the Group’s voting meresi is dess than 5054, these companies are fully consolidated, as the Group controls ifs activities.
(b) Although Lhe Group's voting interest is less than 2085, the Group exercices a significant influence over these companies.
31.122013 21.122012 Voting Teonomic Voting Feonowic interest interest interest inirrest
40.018 4004 1.0% 31005 4006 6s 320% 67%
- - 200% 515
- - 251 69% 40.06 7958 Hos n 20.0% 51% tom 5.14
` - 20015 3555 Adis 9515 50004 pg 21816 935 KI out 5004 HE 5003 31. HF 344 2999 655
- - 25.085 ani 250% $925 250% 63% RAS 53% 345 7298
- - 455% 499% 29456 4928 24646 4926 300% 12356 50058 Dip HS 16.44 El 16.65% 100.040 Mit Is Day 500% 1335 - - ATH ai mis Lin 3005 45% 30.046 459 440% 12.158 Hon 120% 49086 TK 42045 ih RM 304 295 nm 47046 as 470% 420% 39.095 27205 iM 27258 50.056 1.156 500% 1316 2001s 356 20058 35% 45556 12:606 35746 10.6% HI SIS ik 55% Sh 159% 22.604 159% 245% EH HA) 6m 350% 96% 3506 oan SEMA By 48.025 AESA tc? 13:226 End 13-74 25.0 5554 25.086 5335 49,0% 144 49,045 TAM 49.0% TAM 498% TAS 49.0% 145 23056 6595 22515 6% 235% 529 205% 3.815 KI 46% LIM 113% ALI 2h 2008 334 29058 A15 293% 5344 293% OI 435% 73% 195% TA
. - 310% 9008
- - 25.0% 65% 354% SES 3345s 68% Suse 123% ALT its IIK HEI BM ELLE 26015 TIM 1604 TE qum 14% 490% TAM 17.5% 45% 173% 45% 35508 5095 3555 15% 20.086 355 - - 058 8258 420% 10454 353% B1% 335 9155
(c) Although the Group's voting mterestis more than 3094, these comprries are noL controled by the Group, but the Group exercises a significant nfkence over thea.
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 - (Continued) (Amounts expressed in thousands of euro, except when indicated)
Applying SIC 12 as described in Note 2.2, the Group consolidation scope includes, as at 31 December 2013 and 2012, the following special purposes entities:
31.12.2013 economic Consolidation Esiablishe d Headquartered Activily interest method Lusitano SME No.l plo ?" 2006 Ireland Special Purpose Entity 100% Full consolidation Lusitano Mortgages No.6 plc 2007 Ireland Special Purpose Entity 100% Full consolidalion Lusitano Project Finance No.) FTC! 2007 Portugal Special Purpose Entity 100% Full consolidation Lusitano Mortgages No.7 ple ©? 2008 Ireland Special Purpose Entity 100% Full consolidalion Fundes 2008 Portugal Special Purpose Entity 99.30% Full consolidation Lusitano Leverage Finance No. | BY"? 2010 Netherland Special Purpose Entity 100% Full consefidation Lusitano Finance No.3? 2011 Portugal Special Purpose Entity 100% Full consatidation IM DES Empresas (TT 2011 Spain Special Purpose Entity 100% Futl consolidation CLN Magnolia Finance 2038 2008 Treland Special Purpose Entity Le, Full consolidation 31.12.2012 % economic Consolidation Established Headquartered Activily Interest method
Lusitano SMENo.I plc ^ 2006 Ireland Special Purpose Entily 100% Full consolidation Lusitano Mortgages No.6 plc ©? 2007 Ircland Special Purpose Entity 100% Full consolidation Lusitano Project Finance No.1 ETC 2007 Portugal Special Purpose Entity 100% Full consolidation Lusilano Mortgages No.7 le" 2008 Ireland Special Purpose Entity 100% Full consolidation Fundes 2008 Portugal Special Purpose Enlity 99,10% Full consalidation Lusitano Leverage Finance No. i BY"! 2010 Nelheriand Special Purpose Entity 100% Full consolidation Lusitano Finance No.3? 2011 Portugal Special Purpose Entity 100% Full consoldation IM BES Empresas 1) 2011 Spain Special Purpose Entity 100% Full consolidation CLN Magnolia Finance 2038 2008 Treland Special Purpose Entity 100% Full consolidation
(*) Entilies set-up in the scope of securitisation transactions (Sec Note 50).
As at 31 December 2013 and 2012 the consolidation of these entities had the following main impacts on the consolidated balance sheet:
31.12.2013 31.12.2012
(in thousands of euro)
Deposits with banks 173 426 195 586 Other financial assets at fair value through profit and loss 11 204 71 651 Loans aud advances to customers (net of impairment) 3253 477 3 803 343 Debt securities issued 615 201 703 797
F-10
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 ~ (Continued) (Auiounts expressed in thousands of euro, except when indicated)
The main changes in the Group structure that occurred during 2013 are highlighted as follows: — Subsidiaries
* In March 2013 was set-up the company Righthour, entirely held by BES PME Capital Growth fund and in April 2013 this company acquired 100% of the share capital of Imbassai Participaçôes, S.A., which from this date was included in the consolidation perimeter;
* In April 2013, ESSI SGPS, S.A. acquired 31.6% of Espirito Santo Investment Holding Limited for an amount of 17 125 thousand pounds, holding since this date 100% of the company’s share capital;
* In May 2013, ESSI SGPS, S.A. subscribed integrally the capital increase of Espirito Santo Investment Holding Limited in the amount of 10 000 thousand pounds;
* In July 2013, took place the merger of R Invest Ltda and R Consult Participações Ltda into Espirito Santo Serviços Financeitos DTVM;
* In August 2013, took place the merger of ESST Comunicações, S.A. into Banco Espírito Santo de Investimento, S.A..
— Associates (see Note 33)
* In June 2013, following the sale of the business associated with BES À La Card meal banking card, the Group acquired a 50% interest in Edenred Portugal, S.A., this company being currently included in the consolidated financial statements under the equity method. The acquisition cost, amounting to euro 928 thousand, was determined based on the fair value of the business transferred net of the elimination of the unrealised profit in the extend of BES interest in Edenred;
* As at 30 June 2013, BES África acquired 23.9% of Moza Banco share capital by an amount of euro 24 856 thousand, becoming to hold 49% of this associate. The acquisition generated an additional goodwill of euro 16 872 thousand. Following this transaction total goodwill amounts to euro 21 065 thousand and is accounted under associates;
* In June 2013, ES Concessões sold to Ascendi Group the participation it held in Concessionaria Autopista Perote- Xalapa;
* In December 2013, Banco Espirito Santo and Espírito Santo Capital, Sociedade de Capital de Risco sold its shareholdings in Apolo Films, S.L., BRB International and Prosport — Comercializaciones Desportivas, S.A..
The main changes in the Group structure that occurred during 2012 are highlighted as follows: — Subsidiaries
— — In April 2012, ESEG exchanged 2.2% of its direct holding in BES against 6.2%.of BESPAR. This operation-had-no —--. -—— effect on ESFG economic interest in BES (see Note 55);
* In May 2012, BES acquired an additional 50% of the capital of BES Vida by an amount of euro 225 000 thousand, becoming to hold the total share capital of the company and started to consolidate this entity under the full consolidation method (see Note 55);
* Following the acquisition of control of BES Vida in May 2012, the Group acquired an additional interest of 5% in ES Saúde SA;
* In the second semester of 2012, Tranquilidade sold the participation it held in Pastor Vida generating a gain in the amount of euro 11 206 thousand (ses Note 55);
F-11
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
In November 2012, BES acquired participation units in the real estate funds, Fungepi, Fungere and Imoinvestimento, and started to consolidate those entities under the full consolidation method;
During 2012, the Group acquired an additional interest of 0.86% of the share capital of BES through the acquisition in the market of 29 510 581shares (see Note 55);
In November 2012, following (1) the acquisition by Rio Forte Investments, S.A. of an additional 19.596 stake in ES Saúde; (ii) the shareholders’ agreement established between Rio Forte and ESFG; and (iii) the sale by ESFG to Rio Forte of a call option over 5.5% of ES Saúde share capital plus 1 share, currently exercisable; ESFG has lost control over ES Saúde. Consequently, this entity is no longer fully consolidated by ESFG, being classified as an associate (see Note 33 and Note 55).
— Associates (see Note 33)
In April 2012, ES Capital acquired 42.99% of 2BCapital Luxembourg SC a SICAR for the amount of euro 854 thousand. In May 2012, following the capital increase of the company, ES Capital invested an additional euro 15 619 thousand;
In June 2012, ES Concessões transferred its shareholding in SCUTVIAS — Autoestradas da Beira Interior, SA and Portvias — Portagem de Vias, SA to Ascendi Group, SGPS, SA, this operation generated a loss in the amount of euro 2 170 thousand;
In Deceinber 2012, BEST sold the participation it held in Polish Hotel Company, Sp, generating a gain in the amount of euro 2 509 thousand;
Following the loss of control over ES Saúde in November 2012, this entity has been reclassified as an associate (see Note 33 and Note 55).
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2015 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
During the years 2013 and 2012, the movements on acquisitions, disposals and other investments in subsidiaries and associated companies are as follows:
31.12.2013 Acquisitions Disposals / Li qurdagiogs / Bastness combination Gaia/[Iass) oa disposal Netofmon Ae la Seier Other o Total Sate price Olber Total Itqaldatlons controlling imestmeats Teimbursemeuis Tasiness Interest comh sailon fia (oeren of euro) Saleldiarics
DES shares 36 260 - 36 260 (33289) . (33283) ` - BES África - 15000 35000 - . - . -
DES Açores - 654 651 . - - - ES Tech Ventures - 6500 5500 ` - - - - Righour E - 5o - - - - - Fundo DES Absokte Return - - ~ - {19 t3 - = Funds FIM DES Moderado - - - - (27 C20 t = Espírito Santo Securities India - 1733 1753 - - - - - Espírito Santo Eweslrnent Hoking Lange 2028] 11714 31993 - - - - H Lusitania Capital, SA PL de CV, SOFOM, ENR - 33 59 - - - - - Espírito Santo Serviços Financeiros DT VM, SA 207 1342 2049 - - - - - BES Activos Financeiros, Lida - 614 614 - - - H -
R Consul Participações, Lida - - - - ( H3) { 14) H
R Imesl, Lida - - - - (3) (25 - ESSI Comunicações SGPS, SA - - - - (50 (50) - - Fl Mulimercado Treasury 58 - 58 - - - - - 558355 58135 114 992 (33283) (2109 (33523) - -
Assodales
Moza Banco - 21916 24916 - - H - - DASSA - - - (5026) - (5026) 3 4 Adepa Ghtel Services 259 - 250 - - - - - Banca delle Tre Venezie - 690 69 = - . - -
Aulopista Perote Xalapa - H - (60201) - (60201) -
Dorica - 350 350 - - . - BRD Internacional - - - (10659) - (10659) - - Apolo Fims - - - CAD - (79D - . Prosport - - - (2u) - {274} . - Esphito Santo Tera 1 958 - 958 - í 73) Cy - -
Edenred 8113 H 8113 (3129 - (3129 - Ascendi Douro Inferior - - - - { 10) { 10) - - Muhipessod! - 100 100 H - D - - 2321 26056 15397 CBJ 080) C ED (80163) 3 3 66 177 54 192 150369 (113 363) ( 329) (113892) 3 D
Te —À—e— e
(a) Capital increases and loans ta companies
F-13
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
31.12.2012 AcquisIHons Disposa]s fLquidationa / Bosloess combleation Galinhos) on dispont Nei of von Acquisition price Olber w Toll Sale price Other Total Mqutdatfony controling Investments relmbyrsements baslners Interest combluailon Ga (ioris anda of caro) Sulsidiaries BES Vida (+) 225000 - 225000 - - H 87275 206-607 ES Saude - . - MN - . 60332 45007 BES shares 71656 - NES (102 809) - (100 B0) . - DESPAR shares 38300 - 38300 - . - - - Pastor-Vida - - - (1002) - (10072) I 206 206 AOC H - H - - - 35010 - 335010 (142 881) - (h2 3 SSB 261310 Associated companies
Moz Barco - 299 2581 - - H H - Empark - . - . (1595 (ant - . Porras . - - {1067 - (1067) 913 250 Scatvas - . - (49 783) - (49 783) (3083 { 843) AscendiGoup H H452 1362 - H - H - Corands - - H - { 226) ( 286} - - Sousacamp « - - - (3700) {320} . - Tin Soin H - H (1213) - (1219) (9 (2) 2B Capital Lae mbourg 84 15615 16473 . - H - . Nova Figior ` - - (319 H (119) - - Sopratutto Cafés - . - 034) - (13H) E H Ydreans H 204 201 - (m Cn NM - MCO2 H3 1175 1283 - - H - -
MRN-Manotençéo de Redaviss Nacionais, S.A - . - . (m Cy - PoBsh Hotel Company . - - D em . (289) 2500 686 SACEFI - . - (3239 - (3250) 2129 1203 Ku 31451 32418 (59881) (122 (67 3) 25H in 33591) 31451 367428 (201 762) (7297) (210 954) 161323 264 128
M a + — pi
F-14
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
2.1. Basis of preparation and statement of compliance
In accordance with Regulation (EC) no. 1606/2002 of 19 July 2002 from the European Council and Parliament, Espírito Santo Financial Group S.A. (CESFG” or “the Company”) is required to prepare its consolidated financial statements in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union (“EU”).
IFRS comprise accounting standards issued by the International Accounting Standards Board (“TASB”) and its predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”) and its predecessor body.
These consolidated financial statements as at and for the year ended 31 December 2013 were prepared in accordance with the IFRS effective and adopted by the EU until 31 December 2013, The accounting policies applied by the Group in the preparation of its consolidated financial statements as at 31 December 2013 are consistent with the ones used in the preparation of the consolidated financial statements as at and for the year ended 31 December 2012, except as referred to in Note 56, which describes the impact in the preparation of the Consolidated Financial Statements as at 31 Deceinber 2013, of the adoption by the Group of the accounting standards issued by IASB and IFRIC interpretations, effective since 1 January 2013. The accounting policies used by the Group in the preparation of these Consolidated Financial Statements, described in this Note, were modified accordingly. The adoption of these new standards and interpretations had no material effect in the Group’s Consolidated Financial Statements.
The accounting standards aud interpretations recently issued but not yet effective and that the Group has not yet adopted in the preparation of its financial statements can also be analysed in Nate 56.
Moreover and as referred to in Note 1, the Group acquired, in May 2012, an additional 50% interest in BES Vida and the control over its activities. Therefore, from that date, BES Vida, which previously qualified as an associate and was included in the consolidated financial statements up to 2011 under the equity method, is being fully consolidated by the Group. Further details are provided in Note 55.
These consolidated financial statements are expressed in thousands of euro, except when indicated, and have been prepared under the historical cost convention, except for the assets and liabilities accounted at fair value, namely, derivative contracts, financial assets and financial liabilities at fair value through profit or loss, available-for-sale financial assets, investment properties and recognised assets and liabilities that are hedged, in a fair value hedge, in respect of the risk that is being hedged.
The preparation of financial statements in conformity with IFRS requires the application of judgment and the use of estimates and assumptions by management that affects the process of applying the Group’s accounting policies and the reported amounts of income, expenses, assets and liabilities. Actual results in the future may differ from those reported. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
These consolidated financial statements were approved in the Board of Directors meeting held on 25 April 2014. These financial statements are subject to the shareholders approval on the General Assembly, to be held on 30 May 2014.
2.2. Basis of consolidation
These consolidated financial statements comprise the assets, liabilities, gains and losses of Espirito Santo Financial Group S.A. and its subsidiaries (“the Group”), and the results attributable to the Group from its associates.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
These accounting policies have been consistently applied by the Group companies, during all the periods covered by the consolidated financial statements.
Subsidiaries
Subsidiaries are entities over which the Group exercises control. Control is presumed to exist when the Group owns more than one haif of the voting rights. Additionally, control also exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of the entity, so as to obtain benefits from its activities, even if its shareholding is equal or less than 50%. Subsidiaries are fully consolidated from the date on which control is transferred to the Group until the date that control ceases.
Accumulated losses of a subsidiary are attributed proportionally to the owners of the parent and to the non-controiling interest even if this results in non-controlling interest having a deficit balance.
In a business combination achieved in stages (step acquisition) where control is obtained, the Group remeasures its previously held non-controiling interest in the acquiree at its acquisition date fair value and recognises the resulting gain or loss in the income statement when determining the respective goodwill. At the time of a partial sale, from which arises a loss of control of a subsidiary, any remaining non-controlting interest retained is remeasured to fair value at the date the control is lost and the resulting gain or loss is recognised against the income statement.
Associates
Associates are entities over which the Group has significant influence over the company's financial and operating policies but not its control. Generally when the Group owns more than 2096 of the voting rights it is presumed that it has significant influence. However, even if the Group owns less than 20% of the voting rights, it can have significant influence through the participation in the policy-making processes of the associated entity or the representation in its executive board of directors.
Investments in associates are accounted for by the equity method of accounting from the date on which siguificant influence is transferred to the Group until the date that significant influence ceases. The book value of the investments in associates includes the value of the respective goodwill determined on acquisition and is presented net of impairment losses.
In a step acquisition that results in the Group obtaining significant influence over an entity, any previously held stake in that entity is remeasured to fair value through the income statement when the equity method is first applied.
If the Group's share of losses of an associate equals or exceeds its interest in the associate, including any medium and long-term interest, the Group discontinues the application of the equity method, except when it has a legal or constructive obligation of covering those losses or has made payments on behalf of the associate.
Gains or losses on sales of shares in associate companies are recognised in the income statement even if that sale does not result in the loss of significant influence.
Special purpose entities (“SPE”)
The Group consolidates certain special purpose entities (“SPE”), specifically created to accomplish a narrow and well defined objective, when the substance of the relationship with those entities indicates that they are controlled by the Group, independently of the percentage of the equity held.
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ESPÍRITO SANTO FINANCIAL GROUP SA, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnis expressed in thousands of euro, except when indicated)
The evaluation of the existence of control is made based on the criteria established by SIC 12 — Consolidation — Special Purpose Entities, which can be summarised as follows:
* In substance, the activities of the SPE are being conducted in accordance with the specific needs of the Group's business, so that the Group obtains the benefits from these activities;
e In substance the Group has the decision-making powers to obtain the majority of the benefits from the activities of the SPE;
e In substance, the Group has rights to obtain the majority of the benefits of the SPE, and therefore may be exposed to the inherent risks of its activities;
e In substance, the Group retains the majority of residual or ownership risks related to the SPE so as to obtain the benefits from its activities.
Investmeni funds managed by the Group
As part of the asset management activity, the Group manages investment funds on behalf of the holders of the participation units. The financial statements of these funds are not consolidated by the Group except in the cases where control is exercised over its activity based on the criteria established by SIC — 12. It is assumed that there is control when the Group owns more than 50% of the participation units.
Goodwill
Goodwill resulting from business combinations that occurred until ! January 2004 was offset against reserves, according to the option granted by IFRS 1, adopted by the Group on the date of transition to the IFRS.
Goodwill resulting from business combinations that occurred from 1 January 2004 until 31 December 2009 was accounted under the purchase method. The cost of acquisition was measured as tlic fair value, determined at the acquisition date, of the assets and equity instruments given and liabilities incurred or assumed plus any costs direcily attributable to the acquisition. Goodwill represents the difference between the cost of acquisition and the fair value of the Group's share of identifiable net assets, liabilities and contingent liabilities acquired,
For acquisitions on or after 1 January 2010, in accordance with IFRS 3 — Business Combinations, the Group measures goodwill as the fair value of the consideration transferred including the fair value of any previously held non-controlling interests in the acquire, less the net recognised amount (generally fair value) of the identifiable assets acquired and liabilities assumed, all measured as of the acquisition date. Transaction costs are expensed as incurred.
At the acquisition date, the non-controlling interest is measured at their proportionate interest in the fair value of the net identifíable assets acquired and of the liabilities assumed, without the respective portion of goodwill. As a result, the goodwill recognised in these consolidated financia! statements corresponds only to the portion attributable to the equity holders of the Company.
In accordance with IFRS 3 — Business Combinations, goodwill is recognised as an asset at its cost and is not amortised. Goodwill relating to the acquisition of associates is included in the book value of the investment in those associates determined using the equity method. Negative goodwill is recognised directly in the income statement in the period the business combination occurs. —
The recoverable amount of the goodwill recognised as an asset is reviewed annually, regardless of whether there is any indication of impairment. Impairment losses are recognised directly in the income statement.
The recoverable amount corresponds to the higher of the fair value less costs to sell and the respective value in use. In determining value in use, estimated futures cash flows are discounted using a rate that reflects market conditions, time value of money and business risks.
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Transactions with non-controlling interest
Acquisitions of non-controlling interest, that did not result in a change in control, are accounted for as transactions with equity holders in their capacity as equity holders and therefore no goodwill is recognised as a result of such a transaction. Any difference between the consideration paid and the amount of non-controlling interest acquired is accounted for as a movement in equity.
Similarly, sales of non-controlling interest and dilutions from which does not result a loss of control, are accounted for as transactions with equity holders in their capacity as equity holders and therefore no gain or loss is recognised in the income Statement. Ány difference between the sale proceeds and the recognised amount of non-controlling interest in the consolidated financial statements is accounted for as a movement in equity.
Gains or losses on a dilution or on a sale of a portion of an interest in a subsidiary, from which results a loss of control, are accounted for by the Group in the income statement.
Foreign currency translation
The financial statements of each of the Group entities are prepared using their functional currency which is defined as the currency of the primary economic environment in which that entity operates. The consolidated financial statements are prepared in euro, which is ESFG's functional and presentation currency.
The financial statements of each of the Group entities that have a functional currency different from the euro are translated into euro as follows:
* Assets and liabilities are translated into the functional currency using the exchange rate prevailing at the balance sheet date;
* Income and expenses are translated into the functional currency at rates approximating the rates ruling at the dates of the iransactions;
* The exchange differences resulting from the translation of the equity at the beginning of the year using the exchange rates at the beginning of the year and at the balance sheet date are accounted for against reserves net of deferred taxes. Similarly, regarding the subsidiaries and associates results, the exchange differences arising from the translation of income and expenses at the rates ruling at the dates of the transactions and at the balance sheet date are accounted for against reserves. When the entity is sold such exchange differences are recognised in the income statement as a part of the gain or loss on sale.
Balances and transactions eliminated in consolidation
Inter-company balances and transactions, including any unrealised gains and losses on transactions between Group companies, are eliminated in preparing the consolidated financial statements, unless unrealised losses provide evidence of an impairment loss that should be recognised in the consolidated financial statements.
Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. Unrealised losses are also efiminated unless the transaction provides evidence of an impairment loss.
2.3. Foreign currency transactions
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated to euro at the foreign exchange rates ruling at the balance sheet date. Foreign exchange differences arising on translation are recognised in the income statement.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currencies that are stated at fair value are translated to euro at the foreign exchange rates ruling at the dates the fair value was determined. The resulting exchange differences are accounted for in the income statement, except if related to equity instruments
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
classified as available-for-sale, which are accounted for in equity, within the fair value reserve. 2.4. Derivative financial instruments and hedge accounting Classification
Derivatives for risk management purposes include (i) hedging derivatives and (ii) derivatives used to manage the risk of certain financial assets and financial liabilities designated at fair value through profit or loss that were not classified as being hedging derivatives.
Ail other derivatives are classified as trading derivatives.
Derivatives traded in organized markets, namely futures and some options, are recognised as trading derivatives, being marked to market on a daily basis and the resulting gains or losses recognised directly in the income statement. Once the fair value changes on these derivatives are settled daily through the margin accounts held by the Group, these derivatives do not present any fair value on the balance sheet. The margin accounts are included under the caption Other assets and comprise the minimum collateral mandatory for the open positions.
Recognition and measurement
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into (trade date). Subsequent to initial recognition, the fair value of derivative financial instruments is re-measured on a regular basis and the resulting gains or losses on re-measurement are recognised directly in the income statement, except for derivatives designated as hedging instruments. The recognition of the resulting gains or losses of the derivatives designated as hedging instruments depends on the nature of the risk being hedged and of the hedge model used.
Fair values are obtained from quoted market prices, in active markets, if available or are determined using valuation techniques, including discounted cash flow models and options pricing models, as appropriate.
Hedge accounting © Classification criteria
Hedge accounting is used for derivative financial instruments designated as hedging instruments, provided the following criteria are met:
(i) At the inception of the hedge, the hedge relationship is identified and documented, including the identification of the hedged item and of the hedging instrument and the evaluation of the effectiveness of the hedge;
(ii) The hedge is expected to be highly effective, both at the inception of the hedge and on an ongoing basis;
(iii) The effectiveness of the hedge can be reliably measured, both at the inception of the hedge and on an ongoing basis;
{iv) For cash flows hedges, the cash flows are highly probable of occurring.
e Fair value hedge
In a fair value hedge, the book value of the hedged asset or liability, determined in accordance with the respective accounting policy, is adjusted to reflect the changes in its fair value that are attributable to the risks being hedged. Changes in the fair value of the derivatives that are designated as hedging instruments are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the risk being hedged.
If the hedge no longer meets the criteria for hedge accounting, the derivative financial instrument is transferred to the trading portfolio and the hedge accounting is discontinued prospectively. The cumulative adjustment to the carrying amount of a hedged item for which the effective interest rate method is used is amortised to the income statement over the
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
period to maturity.
o Cash flow hedge
When a derivative financial instrument is designated as a hedge of the variability in highly probable future cash flows, the effective portion of changes in the fair value of the hedging derivatives is recognised in equity. Amounts accumulated in equity are recycled to the income statement in the periods in which the hedged item will affect the income statement. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss recognised in equity at that time is recognised in the income statement when the hedged transaction also affects the income statement. When a hedged transaction is no longer expected to occur, the cumulative gain or loss reported in equity is recognised immediately in the income statement and the hedging instrument is reclassified for the trading portfolio.
During the periods covered by these financial statements, the Group did not have any transactions classified as cash flow hedge.
Embedded derivatives
Derivatives that are embedded in other financial instruments are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are measured at fair value with changes in fair value recognised in thc income statement.
2.5. Loans and advances to customers
Loans and advances to customers include loans and advances originated by the Group, which are not intended to be sold in the short term. Loans and advances to customers are recognised when cash is advanced to borrowers.
Loans and advances to customers are derecognised from the balance sheet when (i) the contractual rights to receive their cash flows have expired, (ii) the Group has transferred substantially all risks and rewards of ownership or (iii) although retaining some but not substantially all of the risks and rewards of ownership, the Group has transferred the control over the assets.
Loans and advances to customers are initially recorded at fair value plus transaction costs and are subsequently measured at amortised cost, using the effective interest rate method, less impairment losses.
In accordance with the documented strategy for risk management, the Group contracts derivative financial instruments to manage certain risks of a portion of the loan portfolio, without applying, however, the provisions of hedge accounting as mentioned in Note 2.4. These loans are measured at fair value through profit or loss, in order to eliminate a measurement inconsistency resulting from measuring loans and derivatives for risk management purposes on different basis (accounting mismatch). This procedure is in accordance with the accounting policy for classification, recognition and measurement of financial assets at fair value through profit or foss, as described in Note 2.6.
Impairment
The Group assesses, at each balance sheet date, whether there is objective evidence of impairment within its loan portfolio. Impairment losses identified are recognised in the income statement and are subsequently reversed through the income statement if, in a subsequent period, the amount of the impairment losses decreases.
A loan or a loan portfotio, defined as a group of loans with similar credit risk characteristics, is impaired when: (i) there is objective evidence of impairment as a result of one or more events that occurred after its initial recognition and (ii) that event (or events) has an impact on the estimated future cash flows of the loan or of the loan portfolio, that can be reliably estimated.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The Group first assesses whether objective evidence of impairment exists individually for each Ioan. In fhis assessment the Group uses the information that feeds the credit risk models implemented and takes into consideration the following factors:
the aggregate exposure to the customer and the existence of non-performing loans; the viability of the customers business model and its capability to trade successfully and to generate sufficient cash flow to service their debt obligations;
* the extent of other creditors' commitments ranking ahead of the Group; * thc existence, nature and estimated realisable value of collaterals;
+ the exposure of the customer within the financial sector;
* the amount and timing of expected recoveries.
When loans have been individually assessed and no evidence of loss has been identified, these loans are grouped together on the basis of similar credit risk characteristics for the purpose of evaluating the impairment on a portfolio basis (collective assessment). Loans that are assessed individually and found to be impaired are not included in a collective assessment for impairment.
If an impairment loss is identified on an individual basis, the amount of the impairment loss to be recognised is calculated as the difference between the book value of the loan and the present value of the expected future cash flows (considering the recovery period), discounted at the original effective interest rate. The carrying amount of impaired loans is reduced through the use of an allowance account. If a loan has a variable interest rate, the discount rate for measuring the impairment loss is the current effective interest rate determined under the contract rules.
The changes in the recognised impairment losses attributable to the unwinding of discount are recognised as interest and similar income.
The calculation of the present value of the estimated future cash flows of a coltateralised loan reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral.
For the purposes of a collective evaluation of impairment, loans are grouped on the basis of similar credit risk characteristics, taking in consideration the Group's credit risk management process, Future cash flows in a group of loans that are collectively evaluated for impairment are estimated on the basis of the contractual cash flows of the loans in the Group and historical loss experience. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Group with the purpose of reducing any differences between loss estimates and actual loss experience.
When a Ioan is considered by the Group as uncollectible and an impairment loss of 100% was recognised, it is written off against the related allowance for loan impairment. Subsequent recoveries of amounts previously written off decrease the amount of the loan impairment loss recognised in the income statement.
2.6. Other financial assets
Classification ` e MEM
The Group classifies its other financial assets at initial recognition in the following categories:
* Financial assets at fair value through profit or loss .
This category includes: (1) financial assets held for trading, which are those acquired principaily for the purpose of selling in the short term or that are owned as part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit taking and (ii) financial assets that are designated at fair value through profit or loss at inception.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The Group classifies, at inception, certain financial assets at fair value through profit or loss when: * Such financial assets are managed, measured and their performance evaluated on a fair value basis; e Such financial assets are being hedged (on an economical basis), in order to eliminate an accounting mismatch; or e Such financial assets contain an embedded derivative,
The structured products acquired by the Group corresponding to financial instruments containing one or more embedded derivatives meet the above mentioned conditions, and, in accordance, are classified under the fair value through profit or loss category.
o Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Group's management has the positive intention and ability to hold until its maturity and that are not classified, at inception, as at fair value through profit or loss or as available-for-sale.
$ Avallable-for-sale financial assets
Available-for-sale financial assets are non-derivative financial assets (1) intended to be held for an indefinite period of time, (ii) designated as available-for-sale at initial recognition or (iii) that are not classified in the other categories referred to above.
Initial recognition, initial measurement and derecognition
Purchases and sales of: (1) financial assets at fair value through profit or loss, (ii) held-to-maturity investments and (iii) available-for-sale financial assets are recognised on trade date — the date on which the Group commits to purchase or sell the asset.
Financial assets are initially recognised at fair value plus transaction costs except for financial assets at fair value through profit or loss, in which case these transaction costs are directly recognised in the income statement.
The best evidence of the fair value of the instrument at inception is deemed to be the transaction price. However, in particular circumstances, the fair value of a financial instrument at inception, determined based on a valuation technique, may differ from the transaction price, namely due to the existence of a built-in fee, originating a day one profit.
The Group recognises in the income statement the gains arising from the built-in fee (day one profit), generated, namely, on the trading of derivative and foreign exchange financial products, considering that the fair value of these instruments at inception and on subsequent measurements is determined only based on observable market data and reflects the Group access to the wholesale market.
Financial assets are derecognised when (i) the contractual rights to receive their cash flows have expired, (ii) the Group has transferred substantially all risks and rewards of ownership or (iii) although retaining some but not substantially all of the risks and rewards of ownership, the Group has transferred the control over the assets.
Subsequent measurement
Financial assets at fair value through profit or loss are subsequently carried at fair value and gains and losses arising from _
changes in their fair value are included in the income statement in the period in which they arise.
Available-for-sale financial assets are also subsequently carried at fair value. However, gains and losses arising from changes in their fair value are recognised directly in equity, until the financial assets are derecognised or impaired, at which time the cumulative gain or loss previously recognised in equity is recognised in the income statement. Foreign exchange differences arising from equity investments classified as available-for-sale are also recognised in equity, while foreign exchange differences arising from debt investments are recognised in the income statement. Interest, calculated using the effective interest rate method and dividends are recognised in the income statement,
Held-to-maturity investments are carried at amortised cost using the effective interest rate method, net of any impairment losses recognised.
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ESPÎRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnts expressed in thousands of euro, except when indicated)
The fair values of quoted investments in active markets are based on current bid prices. For unlisted securities the Group establishes fair value by using (i) valuation techniques, including the use of recent arm's length transactions, discounted cash flow analysis and option pricing models and (ii) valuation assumptions based on market information.
Reclassifications between categories
'The Group only reclassifies non-derivative financial assets with fixed or determinable payments and fixed maturities, from the available-for-sale financial assets category to the held-to-maturity investments category, if it has the intention and ability to hold those financial assets until maturity.
Reclassifications between these categories are made at the fair value of the assets reclassified on the date of the reclassification. The difference between this fair value and the respective nominal value is recognised in the income statement until maturity, based on the effective interest rate method. The fair value reserve at the date of the reclassification is also recognised in the income statement, based on the effective interest rate method.
Impairment
The Group assesses periodically whether there is objective evidence that a financial asset or group of financial assets is impaired. A financial asset or a group of financial assets is impaired if there is objective evidence of impairment as a result of one or inore events that occurred after their initial recognition, such as: (i) for equity securities, a significant or prolonged decline in the fair value of the security below its cost, and (ii) for debt securities, when that event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
For held-to-maturity investments, the amount of the impairment loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (considering the recovery period) discounted at the financial asset's original effective interest rate and are recognised in the income statement. The carrying amount of the impaired assets is reduced through the use of an allowance account. If à held-to-maturity investment has a variable interest rate, the discount rate for measuring any impairment loss is the current effective interest rate determined under the contract, For held-to-maturity investments if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment loss was recognised, the previously recognised impairment loss is reversed through the income statement.
If there is objective evidence that an impairment loss on available-for-sale financial assets has been incurred, the cumulative loss recognised in equity — measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in the income statement — is taken to the income statement. If, in a subsequent period, the amount of the impairment loss decreases, the previously recognised impairment loss is reversed through the income statement up to the acquisition cost if the increase is objectively related to an event occurring after the impairment loss was recognised, except in relation to equity instruments, in which case the reversal is recognised in equity.
2.7. Sale and repurchase agreements
Securities sold subject to repurchase agreements (‘repos’) at a fixed price or at the sales price plus a lender's return are not
~derecognised> The" corresponding liability is ineluded-in amounts due to banks or to customers, as appropriate: De" difference between sale and repurchase price is treated as interest aud accrued over the life of the agreements using the effective Interest rate method.
Securities purchased under agreements to resell (‘reverse repos’) at a fixed price or at the purchase price plus a lender's return are not recognised, being the purchase price paid recorded as loans and advances to banks or customers, as appropriate, The difference between purchase and resale price is treated as interest and accrued over the life of the agreements using the effective interest rate method.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
Securities lent under lending agreements are not derecognised being classified and measured in accordance with the accounting policy described in Note 2.6. Securities borrowed under borrowing agreements are not recognised in the balance sheet.
2.8. Financial liabilities
An instrument is classified as a financial liability when it contains a contractual obligation to transfer cash or another financial asset, independently from its legal form.
Non-derivatives financial liabilities include deposits from banks and due to custoiners, loans, debt securities, subordinated debt and short sales. Preference shares issucd are considered to be financial liabilities when the Group assumes the obligation of reimbursement and/or to pay dividends.
The financial liabilities are recognised (i) initially at fair value less transaction costs and (ii) subsequently at amortised cost, using the effective interest rate method, except for short sales and financial liabilities designated at fair value through profit or loss, which are measured at fair value,
The Group designates, at inception, certain financial liabilities as at fair value through profit or loss when: e Such financial liabilities are being hedged (on an economical basis), in order to eliminate an accounting mismatch; or èe Such financial liabilities contain embedded derivatives.
The structured products issued by the Group meet the above mentioned conditions and, in accordance, are classified under the fair value through profit or loss category.
The fair value of quoted financial liabilities is based on the current price. In the absence of a quoted price, the Group establishes the fair value by using valuation techniques based on market information, including the own credit risk of the issuer,
If the Group repurchases debt issued, it is derecognised from the balance sheet and the difference between the carrying amount of the liability and its acquisition cost is recognised in the income statement.
2.9. Financial guarantees
Financial guarantee contracts are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payments when due in accordance with the terms of a debt instrument, namely the payment of principal and/or interests.
Financial guarantees are initially recognised in the financial statements at fair value on the date that the guarantee is issued. Subsequently financial guarantees are measured at the higher of (1) the fair value recognised on initial recognition or (ii) any financial obligation arising as a result of the guarantees at the balance sheet date. Any increase in the liability relating to guarantees is taken to the income statement.
The financial guarantee contracts issued by the Group normally have a stated maturity date and a periodic fee, usually paid in advance on a quarterly basis. This fee varies depending on the counterparty risk, the amount and the time period of the _
contract. Therefore, the fair value of the financial guarantee contracts issued by the Group, at the inception date, equal the initial fee received, which is recognised in the income statement over the period to which it relates. The subsequent periodic fees are recognised in the income statement in period to which they relate.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
2.10. Equity instruments
An instrument is classified as an equity instrument when it does not contain a contractual obligation to deliver cash or another financial asset, independently from its [egal form, being a contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities.
Transaction costs directly attributable to the issue of equity instruments are recognised under equity as a deduction from the proceeds. Amounts paid or received related to acquisitions or sales of equity instruments are recognised in equity, net of transaction costs.
Distributions to holders of an equity instrument are debited directly to equity as dividends, when declared.
Preference shares issued are considered as equity instruments if the Group has no contractual obligation to redeem and if dividends, non cumulative, are paid only if and when declared by the Group.
2.11. Compound financial instruments
Non-derivative financial instruments that contain both a liability and an equity component (e.g. convertible bonds and bonds issued with warrants) are classified as compound financial instruments. For these instruments to be considered as compound financial instruments, the number of shares to be issued upon conversion is determined at the date of issue and does not vary with changes in their fair value. The liability component corresponds to the present value of the future interest and principal payments, discounted at the market rate of interest applicable to similar liabilities that do not have a conversion option. The equity compenent corresponds to the difference between the proceeds of the issue and the amount attributed to the liability. The interest expense recognised in the income statement is calculated using the effective interest method.
2.12. Offsetting financial instruments
Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously.
2.13. Non-current assets held for sale
Non-current assets or disposal groups (groups of assets to be disposed of together and related liabilities that include at least a non-current asset) are classified as held for sale when their carrying amounts will be recovered principally through sale (including those acquired exclusively with a view to its subsequent disposal}, the assets or disposal groups are available for immediate sale and is highly probable.
Immediately before classification as held for sale, the measurement of the non-current assets or all assets and liabilities in a disposal group, is brought up to date in accordance with the applicable IFRS, Subsequently, these assets or disposal group are measured at the lower of their carrying amount or fair value less costs to sell, determined annually in accordance with
the applicable IFRS.
In the scope of its activity, the Group incurs in the risk from failure of the borrower to repay all the amounts due. In case of loans and advances with mortgage collateral, the Group acquires the asset held as collateral in exchange for loans, In accordance with the requirements of Regime Geral das Instituições de Crédito e Sociedades Financeiras (RGICSE), Portuguese banks are prevented, unless authorised by the Bank of Portugal, from acquiring property that is not essential to their daily operations (no. 1 o£ article 112 of RGICSF) being able to acquire, however, property in exchange for loans granted by the Group. This property must be sold within 2 years, period that may be extended by written authorization from the Bank of Portugal and in conditions to be determined by this authority (no. 114 of art of RGICSF).
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Centinued) (Amounts expressed in thousands of euro, except when indicated)
It is Group's objective to immediately dispose all property acquired in exchange for loans. This property is classified as non-current assets held-for-sale and is initially recognised at the lower of its fair value less costs to sell and the carrying amount of the loans. Subsequently, this property is measured at the lower of its carrying amount and the corresponding fair value less costs to sell and is not depreciated. Any subsequent write-down of the acquired property to fair value is recorded in the income statement.
Property valuations are performed in accordance with one of the following methodologies, which are applied in accordance with the specific situation of the asset: a) Market Method The Market Comparison Criteria takes as reference transaction values of similar and comparable property to the property under valuation, obtained through market searching carried out in the zone. b) Income Method Under this method, the property is valued based on the capitalization of its net income, discounted for the present moment, through the discounted cash-flows method. c) Cost Method This method separates the value of property on its basic components: Urbane Ground Value and Urbanity Value; Construction value; and indirect Costs Value.
The valuations are performed by independent specialized entities. The valuation reports are analysed internally with the gauging of processes adequacy, by experts.
2.14. Property and equipment
Property and equipment are measured at cost less accumulated depreciation and impairment losses. At the transition date to IFRS, 1 January 2004, the Group elected to consider as deemed cost, the revalued amount of property and equipment as determined in accordance with previous accounting policies of the Group, which was broadly similar to depreciated cost measured under IFRS, adjusted to reflect changes in a specific price index. The value includes expenditure that is directly attributable to the acquisition of the items. Tn relation to the insurance activity, the Group decided to consider as deemed cost of its buildings for own use the fair value at transition date.
Subsequent costs are included in the asset's carrying amount or are recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group. All other repairs and maintenance are charged to the income statement during the year in which they are incurred.
Land is not depreciated. Depreciation of other assets is calculated using the straight-line method over their estimated useful lives, as follows:
Number of years
Buildings 35 to 50
Improvements in leasehold property {0
Computer equipment 4to5
Furniture 4to 10
nn un Fixtures- - D — 22220 —5149]d]2:— 99e cee run mm
Security equipment 4 to 10
Office equipment 4 to 10
Motor vehicles 4
Other equipment 5
When there is an indication that an asset may be impaired, TAS 36 requires that its recoverable amount is estimated aud an impairment loss recognised when the net book value of the asset exceeds its recoverable amount. Impairment losses are recognised in the income statement.
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ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The recoverable amount is determined as the greater of its net selling price and value in use which is based on the net present value of future cash flows arising from the continuing use and ultimate disposal of the asset.
2.15, Investment properties
The Group classifies as investment property the property held to earn rentals or for capital appreciation or both. Investment property is recognised initially at cost, including transaction costs that are directly attributable expenditures, and subsequently at their fair value. Changes in the fair value determined at each balance sheet date are recognised in the income statement, Investment property is not amortised.
Subsequent expenditure is capitalised only when it is probable that it will give rise to future economic benefits in excess of the originally assessed standard of performance of the asset.
2.16. Intangible assets
The costs incurred with the acquisition, production and development of software are capitalised, as well as the costs incurred to acquire and bring to use the specific software. These costs are amortised on the basis of their expected useful lives, which is usually between three to six years.
Costs that are directly associated with the development of identifiable specific software applications, and that will probably generate economic benefits beyond one year, are recognised as intangible assets. These costs include employee costs from the Group companies specialised in IT directly associated with the development of the referred software.
All remaining costs associated with IT services are recognised as an expense as incurred. 2.17. Leases
The Group classifies its lease agreements as finance leases or operating leases taking into consideration the substance of the transaction rather than its legal form, in accordance with IAS 17 — Leases. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. All other leases are classified as operating leases.
Operaling leases Payments made under operating leases are charged to the income statement in the period to which they relate. Finance leases
e As lessee
Finance lease contracts are recorded at inception date, both under assets and liabilities, at the cost of the asset leased, which is equal to the present value of outstanding Iease instalments, Instalments comprise (i) an interest charge, which is recognised in the income statement and (ii) the repayment of principal, which is deducted from liabilities. Financial charges are recognised as costs over the lease period, in order to produce a constant periodic rate of interest on the remaining balance of liability for each period.
«= As lessor Assets leased out are recorded in the balance sheet as loans granted, for the amount equal to the net investinent made in the leased assets. Interest included in instalments charged to customers is recorded as interest income, while repayments of principal, also included in the instalments, is deducted from the amount of the loans granted. The recognition of the interest reflects a constant periodic rate of return on the lessor's net outstanding investment,
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
2.18. Employee benefits Pensions
To cover the liabilities assumed by the Group within the framework stipulated by the ACT “Acordo Colectivo de Trabalho" and subsequent amendments resulting from the 3 tripartite agreements as described in Note 14 for the banking sector in Portugal and by the CCT “Contrato Colectivo de Trabalho” for the insurance sector in Portugal, pension funds were set up to cover retirement benefits, including widows and orphans benefits and disability for the entire work force and also health-care benefits for employees.
The pension liabilities and health care benefits are covered by funds that are managed by ESAF — Espírito Santo Fundos de Pensões, S.A. a Group's subsidiary.
The pension plans of the Group are classified as defined benefit plans, since the criteria to determine the pension benefit to be received by employees on retirement are predefined and usually depend on factors such as age, years of service and level of salary.
The pension liability is calculated semi-annually by the Group, as at 31 December and 30 June for each plan individually, using the projected unit credit method, and reviewed annually by qualified independent actuaries. The discount rate used in (his calculation was determined with reference to market rates associated with high-quality corporate bonds issues, denominated in the currency in which benefits will be paid and with a maturity similar to the expiry date of the plan obligations. ,
The Group determines the net interest expense (income) for the period on the net defined benefit liability (asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability (asset) at the beginning of the annual period, taking into account any changes in the net defined benefit liability (asset) during the period as a result of contributions and benefit payments. Consequently, the net interest expense (income) includes interest cost on the defined benefit obligation net of a theoretical return on the plan assets, both calculated using the discount rate applied in the determination of the defined benefit obligation.
Remeasurements determined semi-annually and resulting from (i) actuarial gains and losses arising from the differences between actuarial assumptions used and real values obtained (experience adjustments) and from changes in the actuarial assumptions and (ii) gains and losses arising from the difference between theoretical return on plan assets and actual investment returns, are recognised in Other comprehensive income.
At each period, the Group recognises as a cost in the income statement an amount that comprises (i) the service cost, (ii) net interest expense (income), (iii) past service costs and (iv) the effect of settlement or curtailment occurred during the period.
ESFG and its subsidiaries make payments to the fund in order to maintain its solvency and to comply with the following minimum levels: (i) the liability with pensioners shall be totally funded at the end of each year, and (ii) the liability related to past services cost with employees in service shall be funded at a minimum level of 95%.
The Group assesses at each reporting date and for each plan separately, the recoverability of any recognised asset in
- — —-—— relation to tlie defined benefit pension plans; based op the expectation of reductions in-future-contributions to-the-funds. -..— —-
Health care benefits
The Group provides to its banking employees health care benefits through a specific Social-Medical Assistance Service. This Social-Medical Assistance Service (SAMS) is an autonomous entity which is managed by the respective Union.
SAMS provides to its beneficiaries services and/or contributions on medical assistance expenses, diagnostics, medicines, hospital confinement and surgical operations, in accordance with its financing availability and internal regulations.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The annual contribution of the Group to SAMS amounts to 6.596 of the total annual remuneration of employees, including, among others, the holiday and Christmas subsidy.
The measurement and recognition of the Group's liability with post-retirement healthcare benefits is similar to the measurement and recognition of the pension liability described above.
These benefits are covered by the Pension Fund which at present covers all responsibilities with pensions and health care benefits.
Long term service benefits
In accordance with the ACT "Acordo Colectivo de Trabalho" for the banking sector, BES Group has assumed the commitment to pay to current employees that achieve 15, 25 and 30 years of service within the Group, long-term service premiums corresponding, respectively, to 1, 2 and 3 months of their effective monthly remuneration earned at the date the premiums are paid.
At the date of early retirement or disability, employees have the right to a premium proportional to what they would earn if they remained in service until the next payment date.
These long term service benefits are accounted for by the Group in accordance with IAS 19 as other long-term employee benefits.
The liability with long term service benefits is calculated semi-annually, at the balance sheet date, by the Group using the projected unit credit method. The actuarial assumptions used are based on the expectations about future salary increases and mortality tables. The discount rate used in this calculation is determined based on the same methodology described above for pensions.
Tn each period, the increase in the liability for long term service premiums, including actuarial gains and losses and past service costs is charged to the income statement.
Share based payments — Stock option plan
In 2008, ESFG set-up a stock option plan that allows certain employees to acquire ESFG shares, or alternatively to require a cash payment equivalent to the appreciation of ESFG share market price above the strike price.
The options granted to employees may be exercised after their first anniversary and during a ten year period.
This share based payment plan is within the scope of IFRS 2 — Share based payments and corresponds to a cash settlement share based payment.
The fait value of this benefit plan at inception, determined at its grant date, was taken to the income statement as staff costs over a period of one year. The recognised liability under the plan is re-measured at each balance sheet date, being the fair value changes recognised in the income statement under the caption staff costs.
Variable remuneration payment plan on financial instruments (PRVIF,
Following the recommendations of the Supervising and Regulatory authorities, on the BES shareholder's General Meeting, held in 6 April 2010 it was approved a new remuneration policy for BES Executive Committee members. This new remuneration policy is described in Note 14.
The component of the variable remuneration paid in cash is accounted for following IAS 19 — Employee benefits, in the period to which it relates.
The component of the variable remuneration paid with equity instruments is accounted for in accordance with IFRS 2— Share based payments. The fair value of this benefit plan at inception, determined at its grant date, is taken to the income
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
statement as staff costs over the vesting period. The recognised liability under the plan is re-measured at each balance sheet date, being the fair value changes recognised in the income statement.
Bonus to employee
In accordance with TAS 19 — Employee benefits, the bonus payment to employees are recognised in the income statement in the year to which they relate.
2.19, Income tax
Income tax for the period comprises current tax and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Income tax recognised directly in equity relating to fair value re-measurement of available-for-sale financial assets and cash flow hedges is subsequently recognised in the income statement when gains or losses giving rise to the income tax are also recognised in the income statement.
Current tax is the tax expected to be paid on the taxable profit for the year, calculated using tax rates enacted or substantively enacted at the balance sheet date at each jurisdiction.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax basis, aud is calculated using the tax rates enacted or substantively enacted at the balance sheet date in any jurisdiction and that are expected to apply when the related deferred income tax asset is realised or the deferred income tax liability is settled.
Deferred tax liabilities are recognised for all taxable temporary differences except for goodwill, not deductible for tax purposes, differences arising on initial recognition of assets and liabilities that affect neither accounting nor taxable profit and differences relating to investments in subsidiaries to the extent that probably they will not reverse in the foreseeable future. Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences can be deducted.
The Group offsets deferred taxes assets and liabilities for each subsidiary, whenever (i) the subsidiary has a legally enforceable right to set off current tax assets against current tax liabilities, and (ii) they relate to income taxes levied by the same taxation authority. This offset is therefore performed at each subsidiary level, being the deferred tax asset presented in the consolidated balance sheet the sum of the subsidiaries" amounts which present deferred tax assets and the deferred tax liability presented in the consolidated balance sheet the sum of the subsidiaries! amounts which present deferred tax liabilities.
2.20. Provisions
Provisions are recognised when: (i) the Group has present legal or constructive obligation, (ii) it is probable that settlement will be required in the future and (iii) a reliable estimate of the obligation can be made.
When the effect of the passage of time (discount) is material, the provision corresponds to the net present value of the expected future payments, discounted at an appropriate rate considering the risk associated to the obligation.
Restructuring provisions are recognised when the Group has approved a detailed and formal restructuring plan and such restructuring either has commenced or has been announced publicly.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from a contract are lower than the unavoidable costs of meeting its obligation under the contract. The provision is measured at the present value of the lower of the expected cost of terminating the contract and the expected net costs of continuing with the contract.
2,21. Interest income and expense
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Interest income and expense are recognised in the income statement under interest and similar income and interest expense and similar charges for all non-derivative financial instruments measured at amortised cost and for the available-for-sale financial assets, using the effective interest rate method. Interest income arising from non-derivative financial assets and liabilities at fair value through profit or loss is also included under interest and similar income or interest expense and similar charges, respectively.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. The effective interest rate is calculated at inception and it is not subsequently revised, except in what concerns financial assets and liabilities with a variable interest rate. In this case the effective interest rate is periodically revised, having in consideration the impact of the change in the reference interest rate in the estimated future cash-flows.
When calculating the effective interest rate, the Group estimates cash flows considering all contractual terms of the financial instrument (for example, prepayment options) but does not consider future credit losses. The calculation includes all fees and commissions paid or received that are an integral part of the effective interest rate, transaction costs and all other premiums or discounts,
In the case of financial assets or groups of similar financial assets for which an impairment loss was recognised, interest income is calculated using the interest rate used to measure the impairment loss.
For derivative financial instruments, except for derivatives for risk management purposes (see Note 2.4), the interest component of the changes in their fair value is not separated out and is classified under net gains/(losses) from financial assets and financial fiabilities at fair value through profit or loss. The interest component of the changes in the fair value of derivatives for risk management purposes is recognised under interest and similar income or interest expense and similar charges.
2.22. Fee and commission income
Fees and commissions are recognised as follows:
* Fees and commissions that are earned on the execution of a significant act, as loan syndication fees, are recognised as income when the significant act has been completed;
* Fees and commissions earned over the period in which the services are provided are recognised as income in the period the services are provided;
* Fees and commissions that are an integral part of the effective interest rate of a financial instrument are recognised as income using the effective interest rate method.
2.23. Dividend income
Dividend income is recognised when the right to receive payment is established.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
2.24. Fiduciary activities
Assets held in the scope of the fiduciary activity are not recognised in the consolidated financial statements of the Group. Fee and commissions arising from this activity are recognised in the income statement in the period to which they relate.
2.25. Insurance contracts
The Group issues contracts that contain insurance risk, financial risk or a combination of both insurance and financial risk. A contract, under which the Group accepts significant insurance risk from another party, by agreeing to compensate that party on the occurrence of a specified uncertain future event, is classified as an insurance contract.
A contract issued by the Group without significant insurance risk, but on which financial risk is transferred with discretionary participating features is classified as investment contract recognised and measured in accordance with the accounting policies applicable to insurance contracts. A contract issued by the Group that transfers only financial risk, without discretionary participating features, is classified as an investment contract and accounted for as a financial instrument.
The financial assets held by the Group to cover the liabilities arising under insurance and investment contracts are classified and accounted for in the same way as other Group financial assets.
Insurance contracts and investment contracts with discretionary participating features are recognised aud measured as follows:
Premiums
Gross written premiums are recognised for as income in the period to which they respect, in accordance with the accrual accounting principle.
Reinsurance premiums ceded are accounted for as expense in the period to which they respect in the same way as gross written premiums. — .
Unearned premium reserve
The reserve for unearned gross written premiums and reinsurance ceded premiums reflects the part of the written premiums before the end of the period for which the risk period continues after the end of the period. This reserve is calculated using the pro-rata temporis method applied to each contract in force.
Acquisition costs
Acquisition costs that are directly or indirectly related to the selling of insurance and investment contracts with discretionary participating features are capitalized and deferred through the life of the contracts. Deferred acquisition costs are subject to recoverability testing at the time of the insurance policy or investment contract is issued and subject to impairment test (liability adequacy test} at each reporting date.
—-Glaims reserves---—— —- ne de nn a ne ee oa Dn no OC Claims outstanding reflects the estimated total outstanding liability for reported claims and for incurred but not reported claims (IBNR). Reserves for both reported and not reported claims are estimated by management based on experience and available data using statistical methods. Additionally, claims reserve also includes an estimation related with future costs
with claims settlement (“expense reserve").
The mathematical reserves relating to obligations to pay life pensions resulting from workmen's compensation claims is calculated by using actuarial assumptions, with reference to recognised actuarial methods and current labour legislation.
Claims reserves are not discounted, except life pensions arising from workmen's compensation claims.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (mounts expressed in thousands of euro, except when indicated)
Unexpired risk reserve
The reserve for unexpired risks represents the amount by which expected claims and administrative expenses likely to arise after the end of the period, froin contracts concluded before that date, exceeds the unearned premiums reserve, any expected future premiums expected to be written under those contracts and from premiums renewed on January next year.
Life assurance reserve
The life assurance reserve reflects the present value of the Group's future obligations arising from life policies (insurance contracts and investment contracts with discretionary participating features) written and 1s calculated in accordance with recognised actuarial methods within the scope of applicable legislation.
Reserve for bonus and rebates
The reserve for bonus and rebates corresponds to the amounts attributed to policyholders or beneficiaries of insurance or investment contracts, in the form of profit participation, which have not yet been specifically allocated and included in the life assurance reserve.
Liability adequacy test
At each reporting date, the Group performs a liability adequacy test to the insurance and investment contracts with discretionary participating features liabilities, The assessment of the liabilities is performed using the best estimate of future cash flows under each contract. The liability adequacy test is performed product by product or aggregate basis when contracts are subject to broadly similar risks and managed as a single portfolio. Any deficiency determined, if exists, is recognised directly through income.
Shadow accounting
In accordance with IFRS 4, the unrealised gains and losses on the assets covering liabilities arising out from insurance and investment contracts with discretionary participating features are attributable to policyholders, to the extent that it is expected that policyholders will participate on those unrealised gains and losses when they became realised in accordance with the terms of the contracts and applicable legislation, by recording those amounts under liabilities.
2.26. Seginent reporting
The Group adopts IFRS 8 — Segmental reporting, for the disclosure of the financial information by operating segments (see Note 4).
An operating segment is a component of an entity (1) that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the same entity); (ii) whose operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance; and (iii) for which discrete financial information is available.
The results of the operating segments are periodically reviewed by the Management for decisions taking purposes. The
—.-—-- Group prepares-on- a-regular- basis,-financial information: regarding- the- operating-segments;- which is-reported Jo the- ----
Management.
A geographical segment is engaged in providing products or services within a particular economic environment that are subject to risks and return that are different from those of segments operating in other economic environments.
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"` oe or more events have ai impact on the estimated future cash flows of tliese assets: ~
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
2.27. Earnings per share
Basic earnings per share is calculated by dividing net income available to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period, excluding the average number of ordinary shares purchased by the Group and held as treasury stock.
For the diluted earnings per share, the weighted average number of ordinary shares outstanding is adjusted to assume conversion of all dilutive potential ordinary shares, such as convertible debt and share options granted to employees. Potential or contingent share issuances are treated as dilutive when their conversion to shares would decrease net earnings per share,
2.28. Cash and cash equivalents
For the purposes of the cash flow statement, cash and cash equivalents comprise balances with less than three months” maturity from the inception date, including cash and deposits with banks.
Cash and cash equivalents exclude restricted balances with central banks.
NOTE 3 - CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS IN APPLYING ACCOUNTING POLICIES
IFRS set forth a range of accounting treatments and require management to apply judgment and make estimates in deciding which treatment is most appropriate. The most significant of these accounting policies are discussed in this section in order to improve understanding of how their application affects the Group's reported results and related disclosure. A broader description of the accounting policies applied by the Group is shown in Note 2 to the Consolidated Financial Statements.
Because in many cases there are other alternatives to the accounting treatment chosen by management, the Group's reported results would differ if a different treatment were chosen. Management believes that the choices made by it are appropriate and that the consolidated financial statements present the Group's consolidated financial position and results fairly in all material respects.
3.1. Impairment of available-for-sale financial assets
The Group determines that available-for-sale financial assets are impaired when there has been a significant or prolonged decline in the fair value below its cost or when it has identified an event with impact on the estimated future cash flows of the assets. This determination requires judgement, based on all available relevant information, including the normal volatility of the financial instruments prices.
Therefore, for equity securities, considering the high volatility of the markets, a decline (i) over 30% in market value in relation to the acquisition cost generally is regarded by the Group as significant and (if) that persists for more than 12 months is generally regarded as prolonged. Debt securities are considered to be impaired if there i is objective evidence that
In addition, valuations are generally obtained through market quotation or valuation models that may require assumptions or judgment in making estimates of fair value.
Alternative methodologies and the use of different assumptions and estimates could result in a higher level of impairment losses recognised with a consequent impact in the income statement of the Group.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
3.2. Fair value of derivatives and other assets and liabilities at fair value
Fair values are based on listed market prices if available; otherwise fair value is determined cither by dealer price quotations (both for that transaction or for similar instruments traded) or by pricing models, based on net present value of estimated future cash flows which take into account market conditions for the underlying instruments, time value, yield curve and volatility factors. These pricing models may require assumptions or judgments in estimating fair values.
Consequently, the use of a different model or of different assumptions or judgments in applying a particular model may have produced different financial results from the ones reported.
3.3. Impairment losses on loans and advances The Group reviews its loan portfolios to assess impairment on a regular basis, as described in iNote 2.5.
The evaluation process in determining whether an impairment loss should be recorded in the income statement is subject to numerous estimates and judgments. The frequency of default, risk ratings, loss recovery rates and the estimation of both the amount and timing of future cash flows, among other factors, are considered in making this evaluation.
Alternative methodologies and the use of different assumptions and estimates could result in a different level of impairment losses with a consequent impact in the consolidated income statement of the Group.
3.4. Goodwill impairment
Goodwill recoverable amount recognised as an asset of ihe Group is revised annually regardless the existence of impairment losses.
For this purpose, the carrying amount of the business units of the Group for which goodwill has been recognised is compared with the respective recoverable amount. À goodwill impairment loss is recognised when the carrying amount of the business unit exceeds the respective recoverable amount.
In the absence of an available market value, the recoverable amount is determined using cash flows/ dividends predictions, applying a discount rate that includes a risk premium appropriated to the business unit being tested. The determination of future cash flows to discount and the discount rate involves judgement.
Changes in the expected cash flows and in the discount rate may lead to different conclusions from those that led to the preparation of these financial statements.
3.5. Securitisations and special purpose entities (SPE)
The Group sponsors the formation of special purpose entities (SPEs) primarily for asset securitisation transactions and for liquidity purposes.
The Group does not consolidate SPEs that it does not control. As it can sometimes be difficult to determine whether the Group does control an SPE, it makes judgements about its exposure to the risks and rewards, as well as about its ability to - make-operational decisions-for-the-SPE.in question (see-Note 2.2); - -——.— = = e oo cmo s co
The determination of the SPEs that needs to be consolidated by the Group requires the use of estimates and assumptions in determining the respective expected residual gains and losses and which party retains the majority of such residual gains and losses. Different estimates and assumptions could lead the Group to a different scope of consolidation with a direct impact in net income,
3.6, Held-to-maturity investinents
The Group follows the guidance of IAS 39 on classifying non-derivative financial assets with fixed or determinable payments and fixed maturity as held-to-maturity. This classification requires significant judgement.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
In making this judgement, the Group evaluates its intention and ability to hold such investments to maturity. If the Group fails to keep these investments to maturity other than for the specific circumstances — for example, selling an insignificant amount close to maturity — it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value instead of amortised cost.
Held-to-maturity investments are subject to impairment tests made by the Group. The use of different assumptions and estimates could have an impact on the income statement of the Group.
3.7. Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant interpretations and estimates are required in determining the worldwide amount for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business.
Different interpretations and estimates would result in a different level of income taxes, current and deferred, recognised in the period.
The Tax Authorities are entitled to review the Portuguese Group entities" determination of annual taxable earnings, for a period of four years or six years in case there are tax losses brought forward. The determination of annual tax camings by other Group entities (located outside Portugal) can also be subject to similar reviews by their respective tax authorities. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of the tax law. However, the Board of Directors of the Company and those of its subsidiaries, are confident that there will be no material differences arising from tax assessments within the context of the financial statements.
The Company itself is subject to the general tax regulations applicable to Luxembourg commercial companies. The applicable tax rate is 29.22% (31 December 2012: 29.2294).
3.8. Pension and other employees” benefits
Determining pension liabilities requires the use of assumptions and estimates, including the use of actuarial projections, estimated returns on investment, and other factors that could impact the cost and liability of the pension plan.
Changes in these assumptions could materially affect these values. 3.9. Insurance and investment contracts liabilities
Insurance and investment contracts liabilities represent liabilities for future insurance policy benefits. Insurance reserves for traditional life insurance, annuities, and workinen's compensation policies have been calculated based upon mortality, morbidity, persistency and interest rate assumptions applicable to those coverage. The assumptions used reflect the Groups' and market experience and may be revised if it is determined that future experience will differ substantially from that previously assumed. Insurance and investment contracts liabilities include: (i) unearned premiums reserve, (ii) life mathematical reserve, (iii) reserve for bonus and rebates, (iv) unexpired risk reserve, (v) liability adequacy test and (vi) claims reserves. Claims reserves include estimated provisions for both reported and unreported claims incurred and related
- expenses; —- -——- nm . L-. eL -— Loco = —- MM
When claims are made by or against policyholders, any amounts that the Group pays or expects fo pay are recorded as losses, The Group establishes reserves for payment of losses for claims that arise from its insurance and investment contracts,
In determining their insurance reserves and investment contracts liabilities, the Group's insurance companies perform a
continuing review of their overall positions, their reserving techniques and their reinsurance coverage. The reserves are also reviewed periodically by qualified actuaries.
F-37
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 - (Continued) (Amounts expressed in thousands of euro, except when indicated)
The Group maintains property and casualty loss reserves to cover the estimated ultimate unpaid liability for losses with respect to both reported and not reported claims incurred as of the end of each accounting year.
Claims reserves do not represent an exact calculation of liability, but instead represent estimates, generally using actuarial valuations/techniques. These reserve estimates are expectations of what the ultimate settlement of claims is likely to cost based on an assessment of facts and circumstances then known, a review of historical settlement patterns, estimates of trends in claims severity, frequency, legal theories of liability and other factors. Variables in the reserve estimation process can be affected by both internal and external events, such as changes in claims handling procedures, economic inflation, legal trends and legislative changes. Many of these items are not directly quantifiable, particularly on a prospective basis. Additionally, there may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to (he insurer. Reserve estimates are continually reviewed in a regular ongoing process as historical loss experience develops and additional claims are reported and settled.
NOTE 4 - SEGMENTAL REPORTING
Group activities are focused primarily on the banking and insurance sectors and are directed to companies, institutional and private customers. The Group's principal operating subsidiaries are located in Portugal, which makes it its privileged market. The historical link with Brazil and Africa, the globalization of the Portuguese companies and the Portuguese emigration to several countries, led to an internationalisation of the Group, which already has an international structure contributing significantly to the Group's activities and results. The Group is also active in Portugal in the health-care management business,
The Group's products and services include deposits, loans to retail and corporate customers, fund management, broker and custodian services, investment banking services, as well as the issuance and commercialisation of life and non-life insurance products. Additionally, the Group makes short, medium and long term investinents in the financial and currency exchange markets with the objective of taking advantages from the prices changes or to have a return from its available resources.
The Group has BES as its main banking operating unit - with 636 branches in Portugal and with branches in London, New York, Spain (25 branches), Nassau, Cayman Islands, Cape Verde, Venezuela, Luxembourg and Madeira Free Zone and 15 representation offices- with BES Investmento (investment banking) BES Angola (41 branches), BES Açores (18 branches), Banco BEST (11 branches), Espírito Santo Bank, BES Oriente, Aman Bank, BES Cape Verde, BES Vénétie, Espirito Santo Activos Financeiros (ESAF), ES Bank Panama, ES Bank Dubai and Banque Privée Espirito Santo. Tranquilidade, Logo and BES Seguros are the Group's non-life operating unit while T-Vida and BES-Vida are active in life-insurance.
When evaluating the performance by business area, the Group considers the following Operating Segments: (1) Domestic Commercial Banking, including Retail, Corporate, Institutional and Private Banking; (2) Asset Management; (3) International Commercial Banking including Private banking; (4) Investment Banking; (5) Capital Markets and Strategic Investments; (6) Non-Life Insurance; (7) Life Insurance; (8) Health-care management and (9) Corporative Centre, Each segment includes the Group structures that directly or indirectly relate to it, and also the other units of the Group whose activities are most related to one of these segments. The performance of each operating unit of the Group (considered as an investment centre) is evaluated individually.
` Complementary, the Group, uses a segmentation of its activities and results according to geographic criteria, segregating ^ ~
the activity and the results generated from the units located in Portugal (domestic activities) from the units located abroad (international activities).
F-38
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
dl Operating Seginents Description Each of the operating segments includes the following activities, products, customers and Group structures: Domestic Commercial Banking
This operating segment includes all the banking activity with corporate and institutional customers developed in Portugal, based in the branch offices network, corporate centres and other channels and includes the following:
a) Retail: corresponds to all activity developed by BES in Portugal with private customers and small business, fundamentally originated by the branches network, agent network and electronic channels. The financial information of the segment relates to, among other products and services, mortgage loans, consumer credit, financing the clients’ activity, deposits repayable on demand and term deposits, retirement plans and other insurance products to private customers, commissions over account management and electronic payments, the investment funds cross-selling and brokerage and custodian services.
b) Corporate and Institutional: includes BES activities in Portugal with small, medium and large companies, through its commercial structure dedicated to this segment, which includes 24 corporate centres. Also includes activities with institutional and municipal customers. The main products considered on this seginent are: discounted bills, leasing, factoring and short and long term loans; includes deposits and guarantees, custodian services, letters of credit, electronic payments management and other services.
c) Private Banking: includes private banking activity in Portugal, all profit, loss and assets and liabilities associated to customers classified as private by the Group in Portugal. The main products considered on this segment are: deposits; discretionary management, selling of investment funds, custodian services, brokerage services and insurance products.
Asset Management
This segment includes the asset management activities developed by ESAF in Portugal and abroad (Spain, Brazil, Angola, Luxembourg and United Kingdom). ESAF's products include all types of funds - investment funds, real estate funds and pension funds, and also includes discretionary management services and portfolio inanagement.
International Commercial Banking
This operating segment includes the units located abroad, which banking activities are focused on corporate, retail customers and private banking, excluding investment banking and asset management, which are integrated in the corresponding segments.
Among the units comprising this segment are BES Angola and Spain, London and New York Branches of BES, ES Bankers Dubai, ES Bank Panama and Banque Privée. The main products included in this segment are deposits, credit, asset management fees, leveraged finance, structured trade finance and project finance operations.
Investment Banking
This segment includes assets, liabilities, profits and losses of the operating units that consolidate in BES Investimento,
“which comprises all the investment banking activities of the Group originated in Portugal and abroad. In addition to the ^ lending activity, deposits and other forms of funding, it includes advisory services, mergers and acquisitions, restructuring and debt consolidation, initial public offerings (shares and bonds), brokerage and other investment banking services.
F-39
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Capital Markets and Strategic Investments
This segment includes the financial management of the Group, namely the investments in capital markets instruments (equity and debt), whether they are integrated in trading, fair value, available for sale or held to maturity financial assets portfolios. Also included in this segment is the Group's investment in non-controlling strategic positions, as well as all the activity inherent to interest rate and exchange rate risk management, long and short positions on financial instruments management, which allow the Group to take advantage of the price changes in those markets where these instruments are exchanged.
Non-Life Insurance
This segment includes the activities of Tranquilidade and Logo in the non-life insurance sector as well as the Group's participation in the activities of its associated companies, BES-Seguros and Europ-Assistance.
Life Insurance
This segment includes the activities of T-Vida and BES Vida in the life insurance sector.
Health-care management
This segment includes the Group's activities in the management of hospitals, outpatient clinics, residential hospitals and senior citizen residences through ES Saüde. Considering the Ioss of control over ES Saüde occurred in 2012 (see Note 55) this segment was discontinued on ESFG perspective.
Corporative Centre
This area does not correspond to an operating segment. It refers to an aggregation of corporative structures acting throughout the entire Group, such as Representative Office in London, areas related to the Board of Directors, Compliance, Financial and Accounting, Risk management, Investor Relations, Internal Audit, Organization and Quality, among others. It also includes the corporate borrowings of the Group.
42. Allocation criteria of the activity and results to the operating segments
The financial information presented for each segment was prepared in accordance with the criteria followed for the preparation of internal information analysed by the decision makers of the Group, as required by IFRS.
The accounting policies applied in the preparation of the financial information related with the operating segments are consistent with the ones used in the preparation of these consolidated financial statements, which are described in Note 2, having been adopted the following principles.
Measurement of profit or loss from operating segments
The Group uses net income before taxes as the measure of profit or loss for evaluating the performance of each operating
--Ssegment;—— —- ==- "0.000 -= —- on m mm e LI eue -- wee = — - - -— o na um nn a ne e o.
Autonomous Operating Segment's As mentioned above, each operating unit (subsidiaries and associated entities) is evaluated separately, as these units are
considered investment centres. Additionally, considering the characteristics of the business developed by these units, they are fully included in one of the operating segments, assets, liabilities, equity, income and expenses.
F-40
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
ESFG structures dedicated fo segments
The activity of BES, ESFG's main subsidiary, comprises most of its operating segments and therefore its activity is disaggregated.
For the purpose of allocating the financial information, the following principles are used: (i) the origin of the operation, (ii) the type of product or service rendered; (iii) the segment to which the commercial and central structures are dedicated to; (iv) the Cost Based Approach (CBA) model and other specific drivers in the allocation of indirect cost (central support and IT services); (vi) the impairment model in the allocation of credit risk; (vii) total equity is allocated to the capital markets and strategic investments segment.
The transactions between the independent and autonomous units of the Group are made at market prices; the price of the services between the structures of each unit, namely the price established for funding between units, is determined by a margin process (which vary in accordance with the strategic relevance of the product and the balance between funding and lending); the remaining internal transactions are allocated to the segments in accordance with CBA without any margin from the supplier,
The interest rate risk, exchange risk, liquidity risk and others, except for credit risk, are included in the Financial Department, whose mission is to make the Group's financial management. The related activity and results are included in Capital Markets and Strategic Investments segment.
Interest and similar income/expense
Since the Group's activities are mainly related to the financial sector and the majority of the segments revenues are from interest, the Group relies primarily on net interest revenue to assess the performance of the segment and to make decisions about resources to be allocated to the segment. As such and as permitted by IFRS 8 paragraph 23, the Group reports segments interest revenue net of its interest expense.
Consolidated Investments under the Equity Method
Investments in associated companies consolidated under the equity method are included in (he operating segment they relate to. Associates not directly related to a specific operating segment are included in the Capital Markets and Strategic Investments seginent.
Non current assets
Non current assets, according to IFRS 8, include Other Tangible Assets and Intangible Assets. BES includes these assets on the Capital Markets and Strategic Investments segment; the non current assets held by the subsidiaries are allocated to the segment in which these subsidiaries develop their business.
Income faxes
Income tax is a part of the Group net income but does not affect the evaluation of most of the Operating Segments. Deferred tax assets and liabilities are included in the Capital Markets and Strategic Investments segment.
Post Employment Benefits
Assets under post employment benefits are managed in a similar way to deferred income taxes assets, and are included in the Capital Markets and Strategic Investments segment. The factors that influence the amount of responsibilities and the amount of the funds” assets correspond, mainly, to external elements; it is Group's policy not to include these factors on the performance evaluation of the operating segments, which activities relate to customers.
F-41
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Domestic and International Áreas
In the disclosure of financial information by geographical areas, the operating units that comprise the International Area are: BES Angola and its branches, BES Oriente, Espírito Santo Bank, ES Bankers Dubai, ES Bank Panama, Banque Privée Espírito Santo, Espírito Santo Vénétie, Banco Delle Tre Venezie, ESFIL, London, Spain, New York and Cape Verde, Venezuela and Luxembourg branches of BES, and the operating units located abroad from BES Investimento and ESAF.
The financial elements related to the International Area are presented in the financial statements of those units with the respective consolidation and elimination adjustments.
F-42
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 5- NET INTEREST INCOME
This balance is analysed as foliows:
31.122013 31.12.2012. t Assets Assels f _Assels/ Assels f Liabilities at kana Liabilities al a hapa + Liabilities at a Liabilities at amortised cos! : amortised cost . : fair salue Total : fair value Tolal and available- " h profil and available- th h profit for-sale as pre for-sale ien pron financial assets or toss financial asseis or loss fin thonsauds of eara) Interest and similar income Interest from loans and advances 2431 191 14187 2445313 2675102 2367 2 683 469 Interest ftom deposits with banks 47 499 307 48306 27023 3749 30772 Interest from financial assels at fair value through profit or loss - 255 526 255 526 - 256 548 256 548 Interest from available-for-sale Imancialassets 395917 - 395917 555253 - 555253 Interes! from held to malunty 53305 - 53305 54813 - 54813 Interest fram derivalives for risk management purposes - 395 474 395 474 - 459012 459 012 Other interest and similar income 35350 - 35350 57814 - 578|4 2963 262 665 994 3629 256 3370 005 727 676 4 097 681 Interest expense and similar charges Interest from debt securilies (799351) (67 134) ( 866 485) (886619) (37481) (924130) Interest fromamounts due to customers (971471) (49321) (1 020 792) (1006 421) (33 164) (1039 585) Interest from deposits from central banks and other banks (330756) (11343) (342 599) (411 528) (11028) (422 556) Interest fromsubordinated debt (27735) - (97735) (95365) - (95365) Interest from derivalives for risk management purposes - (195 462) (195462) - (343532) (343 532) Otherinterest expenses and similar charges (13 688) . (13688) (7232) H (7292) (2213 001) (323 760) (2536761) {2407 255) (425205) (2 832 460) 750 261 342234 1092 495 962 750 302 471 1265221
Interest from loans and advances includes an amount of euro 103 082 thousand (31 December 2012: euro 78 290
thousand) related to the unwind of discount regarding the impairment losses of loans and advances to customers that are overdue (see Note 26).
Interest from derivatives for risk management purposes includes, in accordance with the accounting policy described in Notes 2.4 and 2.21, interest from hedging derivatives and from derivatives used to manage the risk of certain financial assets and financial liabilities designated at fair value through profit or loss in accordance with the accounting policies described in Notes 2.5, 2.6 and 2.8.
NOTE 6 - NET FEE AND COMMISSION INCOME
F-46
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
This balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Fee and commission income
From banking services 489 804 604 676 From guarantees granted 258 469 233 432 From transactions with securities 73 154 64 287 From commitments assumed to third parties 28 942 38 774 Other fee and commission income 76 391 93 977 926 760 ` 1 035 146 Fee and commission expenses
From banking services rendered by third parties (83 749) (79 555) From transactions with securities (21 489) (26 571) From guarantees received (70 054) (59 819) Other fee and commission expense (28 336) (19 587) (203 628) (185 532)
723 132 849 614
Fee and commission expenses from guarantees received includes as at 31 December 2013, the amount of euro 60.6 million (31 December 2012: euro 58.5 million) related with the guarantees received from the Portuguese government in relation with the debt issued by the Group.
F-47
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 7 - NET (LOSSES) FROM FINANCIAL ASSETS AND FINANCIAL LIABILITIES AT FAIR
VALUE THROUGH PROFIT OR LOSS
This balance is analysed as follows:
Total
(in thousands of euro)
(73 570) 8183
(18 544)
31.12.2013 — Gains — Losses Total Trading assels and liabilites Securilies Bonds and other fixed income securities Issued by government and public entities 90 728 (164 298} Issued by other entities 20 787 ( I2 604) Shares 43638 (62 182) Other variable income securities 1167 (1552) 156 320 (240 636) Derivative financial instruments Exchange rate contracts 2 813 561 (2 815 009) Tntesest rate contracts 5408 069 (5 553 884) Equity/Index contracis 2152703 (2 167 803) Credit default contracts 506 019 (539 289) Other 31183 (22 206)
(84316)
(1448) ( H5 815) (15 190) (33 270) 8977
31.12.2012 Gains Losses Total
943 283 (723 240) 220 043 13243 (26 149) (12906) 43947 (47 763) (35816) 1185 (1149) 36 1001 658 (798 301) 203 357 1040 084 (1038 856) 1228 4 956 739 {4911 210) 45 529 1342619 (1325 590) 17029 253 554 (783 848) (30 294) 107 646 42 859 150 505
Financial assets and ilabllltics at fair value throvgh profit or loss
17 887 41508 (50056) (167 907)
Securilics Bonds and other fixed income securities Issued by goverament and public entities 63 H2 (37593) Issued by other entities 2049 451 (2020 370) Shares 270 543 (263 270) Other variable income securities 2472179 (2 420 908) 4855885 {4 742 141) Financial assets ™ Loans and advances to customers 36605 (15 779) 36 605 (15 779) Financial liabilities “ Deposits from banks 17 887 - Due to customers 92014 (50506) Debt securities issued 44 449 (94 505) Investment coniracis 63 857 (231 764) Subordinated debt t - 218 207 (376 775)
61358 (2654) 61 704 187 507 (111 519) 15988 2025 (5812) (3787) 120 699 (189 515) (68 816) 374 589 (309 500) 65 089 8 768 (9 406) ( 638) 8 768 (9 406) ( 638) 1091 (25228) (2413) 57034 (168007 ` (110973) 71173 (267531) — (196358) 71859 (247914) — (176055) 2715 (1759) 956 203 872 (710439) (506567)
16178552 (16473 522)
[E includes the fair value change of hedged assets and liabilities and of assels and liabilities at fair valve 1hrough profit or loss
(294 970)
9789529 (9844291) = (54762)
As at 31 December 2013, this balance includes a negative effect of euro 73.3 million related to the change in fair value of financial liabilities designated at fair value through profit or loss, attributable to the Group's credit risk component (31 December 2012: negative effect of euro 35.2 million).
In accordance with tlie accounting policies followed by the Group, financial instruments are initially recognised at fair value. The best evidence of the fair value of the instrument at inception is deemed to be the transaction price.
F-48
ESPÎRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnis expressed in thousands of euro, except when indicated)
However, in particular circumstances, the fair value of a financial instrument at inception, determined based on a valuation techniques, may differ from the transaction price, namely due to the existence of a built-in fee, originating a day one profit.
The Group recognises in the income statement the gains arising from the built-in fee (day one profif), generated, namely, on the trading of foreign exchange financial products, considering that the fair value of these instruments at inception and on subsequent measurements is determined only based on observable market data and reflects the Group access to the wholesale market.
In 2013, the gains recognised in the income statement arising from the built-in fee amounted to approximately euro 13 691 thousand (2012: euro 14 587 thousand) being substantially related to foreign exchange transactions.
NOTE 8 - NET GAINS FROM AVAILABLE-FOR-SALE FINANCIAL ASSETS This balance is analysed as follows:
31.12.2013 31.12.2012 Gains Losses Total Gains Losses Total
(in thousands of euro) Bonds and other fixed income securities
Issued by govemment and public entities 384 609 (21 815) 362 794 821 775 (24 937} 706 838 Issued by other entities 21 865 (19618) 2247 81219 (66 115} 15104 Shares 84 706 (17055) 67651 46 541 (250272) (203731) Other variable income securilies 31657 (12700) 18 957 14 282 (16925) (2643) 522831 (71 188) 451 649 963 817 (358 249) 605 568
During the year ended 31 December 2013, the Group sold at market prices through the stock exchange, 77.4 million ordinary shares of EDP, this transaction generated a realised net gain of euro 53.7 million (euro 14.7 million net of non-controlling interest) (see Note 24).
During the year ended 31 December 2012, the Group sold at market prices through the stock exchange, 96.4 million ordinary shares of EDP and 260.7 million ordinary shares of Portugal Telecom. These transactions generated a realised net loss of euro 224.9 million (euro 61.5 million net of non-controlling interest) (see Note 24).
NOTE 9 - NET (LOSSES) FROM FOREIGN EXCHANGE DIFFERENCES
This balance is analysed as follows:
“3122013. 0.0. 0... "EN .— 31.12,2012 Gains Losses Total Gains Losses Total (in thousands of euro) Foreign exchange translation 945 107 (945 795) (2688) 1048 822 (1067 191} (18 369) 943 107 (945 795) {2 688) 1 048 822 (1 067 191) (18 369) = —— ———— ————
This balance includes the exchange differences arising on translating monetary assets and liabilities at the exchange rates ruling at the balance sheet date in accordance with the accounting policy described in Note 2.3.
F-49
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 10- NET (LOSSES) FROM THE SALE OF OTHER ASSETS 31.12.2013 31.12.2012 (in thousands of euro) (20 738) (39 507)
(52261) (6382) 5 936 3316
Loans and advances to customers Non-current asseis held for sale Other
(67 063) (42 573)
As at 31 December 2013, Loans and advances to customers include a loss of euro 0.1 million related to the sale of euro 63 million of credits realised within the deleverage program of the Group (31 December 2012: loss of euro 29.6 million related to the sale of euro 262 millions of credits).
NOTE 11- INSURANCE EARNED PREMIUMS, NET OF REINSURANCE
The insurance earned premiums, net of reinsurance, can be analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
814 756 468 168
Gross premiums written (122 122) ( 63 990)
Reinsurance premiums ceded
Net premiums written 692 634 404 178 Change in the provision for unearned premiums,
net ofreinsurance 2034 3 454
694 668 407 632
Famed premiums, net ofreinsurance ===
F-50
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The direct insurance written and earned premiums are analysed as follows:
31.12.2013 31.12.2012 Written Earned Written Earned
premiums premiums premiums premiums (in thousands of euro)
Life 469 118 468 292 114 780 114 079 Non-life:
Direct Business
Accident and health - 101 563 100 067 160 660 101 281
Fire and hazards 64 205 64 754 64 100 63 563
Motor 144 410 148 904 153 773 156 705
Maritime, airline and transportation TIM 7621 6 878 6672
Third party liability 11499 11 384 11080 11162
Credit and surety ship 51 42 40 43
Other f 15715 16 049 16 086 16 039
Tolal 814 355 817 113 467 397 469 544
Reinsurance accepted 401 368 771 764
814 756 817 481 468 168 470 308
=
The reinsurance ceded premiums are analysed as follows:
31.12.2013 31.12.2012 Written Earned Written Earned
premiums premiums premiums premiums {in thousands of curo)
Life 64 294 64293 8 681 8 118 Non-life:
Direct Business
Accident and Health 4097 3744 3348 3 420
Fire and hazards 29411 29 900 28 744 28 180
Motor 1887 2111 1972 1959
Maritime, airline and transportation 4384 4153 3757 3687
Third party liability 1430 1421 1401 1396
Credit and surety ship 16 15 14 17
Other 15 229 16 066 LS 701 15 594
Total 120 748 121 703 63 618 62371
"^ Reisurinteüccepted "7" ` tcc BIAS HO --- 032 --—305- 122 122 122 813 63 990 62 676
n MR SW PP [= E
F-51
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Gross written premiums from life insurance business are analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro) Annuities 9 861 5 733 Risk contracts 77 324 71290 Saving contracts with profit sharing 382 133 37757 469 118 114 780
In accordance with IERS 4, the contracts issued by the Group for which there is only a transfer of financial risk, with
no discretionary participating features, are classified as investment contracts and accounted for as financial liabilities.
The increase in gross written premiums in 2013 is essentially due the significant increase in the capitalization products and retirement plans.
F-52
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE12- OTHER OPERATING INCOME AND EXPENSES
These balances are analysed as follows: 31.12.2013 31.12.2012
(in thousands of euro) Other operating income arising from:
Medical services business 13 944 262 514 Insurance business 6873 14 745 IT related business 1 720 5689 Call center business 11969 13 117 Fair value adjustment on investment properties (see Note 31) 8572 2 900 Gains on repurchase of Group debt securities (see Notes 39 and 43) 14 118 113721 Non recurring gains on advisory services 3671 4 299 Other 13 976 41 952
74 843 458 937
Other operating expenses arising from:
Direct and indirect taxes (22921) (22 261) Contributions to the depositors guarantee fund (12 865) ( 10 370) Membership and donations (6930) (8870) Medical services business (2359) ( 155 685) Insurance business ( 16 657) (24 700) Fair value adjustment on investment properties (see Note 31) (2 627) (18611) Contribution to banking sector (27 289) (27910) Contribution to funds ofresolution (11813) - Losses on repurchase of Group debt securities (see Notes 39 and 43) (7 343) - Other (47 165) (8583)
(157 969) (276 990)
(83 126) 181 947
The decrease in other operating income - Medical services business relates to the acquisition by Rio Forte Investments, S.A. of an additional [9.596 stake in ES Saúde. ESFG has lost control over ES Saúde in 2012. Consequently, this entity is no longer fully consolidated by ESFG, being classified as an associate.
As at 31 December 2012, Other operating income includes a gain of euro 21.8 million related with the negative past service cost (gain) which arose from the change introduced by Decree Law 133/2012 to the calculation method for the death allowance (see Note 14).
` A Also under Other operating income, as at 31 December 2012, is included the gain of euro 10.3 million arising from `
the termination of the exclusive distribution agreement established between ESAT (through Gespator) and Banco Pastor, following the change of control of Banco Pastor occurred in the first semester of 2012 as explained in Note 32.
F-53
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ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
25.8 million aud euro 38.4 million, respectively.
As at 31 December 2013 and 2012, the number of employees of the Group is analysed as follows:
31.12.2013 31.12.2012
Banking sector employees IO 624 10 309 Health sector emplayees 358 366 Insurance sector employees 732 709
Employed by other companies cssencially providing services to customers outside the Group 568 652 12282 12 036
By professional category, the number of employees of the Group is analysed as follows: 31.12.2013 31.12.2012
Senior management 1292 1254 Management 1398 1289 Specific functions 4 767 4778
Administrative functions and others 4 825 4715
12 282 12 036
NOTE 14- EMPLOYEE BENEFITS
Pension and health-care benefits
As described in Note 2,18, the Group's companies operate defined pension and health-care plans for their employees and their dependants under which the benefits vest on the earlier of retirement, death or incapacity.
However, it should be noted that in what concerns the banking subsidiaries, the employees hired after 31 March 2008 are covered by the Portuguese Social Security scheme.
Additionally, with the publication of Decree-Law n.1-A / 2011 of January 3, all banking sector employees beneficiaries of "CAFEB — Caixa de Abono de Familia dos Empregados Bancärios” were integrated into the General Social Security Scheme from 1 January 2011, which assumed the protection of banking sector employees in the contingencies of maternity, paternity and adoption and even old age, remaining under the responsibility of the banks the protection in sickness, disability, survivor and death.
- Retirement pensions of banking employees integrated-into the General Social Security Regime from 1 January 2011,-
continue to be calculated according to the provisions of ACT and other conventions. Banking employees, however, are entitled to receive a pension under the general regime, which amount takes into account the number of years of discounts for that scheme. Banks are responsible for the difference between the peusion determined in accordance with the provisions of ACT and that the one that the banking employees are entitled to receive from the General Social Security Regime.
The contribution rate to the Social Security Regime is 26.6%, 23.6% paid by the employer and 3% paid by the
employees, instead of Caixa de Abono de Família dos Empregados Bancários (CAFEB), abolished by the same law. In consequence of this change, the pension rights of active employers is to be covered under the terms defined by the
E-55
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
General Social Security Regime, taking into account the length of service from 1 January 2011 until retirement. The differential required to support the guaranteed pension in terms of the ACT is paid by the Banks.
At the end of 2011 following the third tripartite agreement established between the Portuguese Government, the Portuguese Banking Association and the banking sector employees unions, it was decided to transfer to the Social Security Regime the banks liabilities with pension in payment as at 31 December 2011.
The tripartite agreement established, provides for the transfer to the Social Security sphere of the liabilities with pensions in payment as of 31 December 2011 at constant values (096 discount rate). The responsibilities relating to updates of pensions value, other pension benefits in addition to those to be borne by the Social Security, health-care benefits, death allowance and deferred survivor pensions, will remain in the sphere of responsibility of the banks with the correspondent funding being provided through the respective pension funds.
The banks pension funds assets, specifically allocated to the cover of the transferred liabilities, were also be transferred to the Social Security.
Being thus a definitive and irreversible transfer of the liabilities with pensions in payment (cven if only on a portion of the benefit), the conditions set out in IAS 19 ‘Employee benefits’ underlying the concept of settlement were met, as the obligation with pension in payment as at 31 December 2011 extinguished at the date of transfer.
The actuarial valuation of pension and health-care benefits for the Group companies is performed every half-year, with latest valuation performed as at 31 December 2013. On annual basis, the actuarial valuation is reviewed by an independent actuary.
As at 31 December 2013 and 2012, the main assumptions considered in the actuarial valuation, to determine the defined benefit obligation of pension and health-care benefits for the Group employees are as follows:
Insurance sector Banking sector 31.12.2013 31.12.2012 m m 31.12.2013 31.12.2012 1 through 4" and subsequent 1 through 5" and subsequent
3" year years year years Financial assumptions Salaries increase rate 1% -2.5% (*) O%- 2.5% (*) 0.00% 0.75% 0.00% 0.75% Pensions increase rate 0% - 2.5% (*) CA - 2.5% (+) 1.00% 1.75% 1.00% 1.75% Early retirements pensions increase rale 1% - 2.5% (*) 1.00% - - - - Expected relum of plan assels 1.75% 1.26% - 425% 4.00% 450% Discount rate 375% 1.26% - 4.25% 4.00% 450% Demographic assumptions Mortality table Men GKF 95 TV 73/77 (zdjusted) Women GKF 95 TY 88/90 Actuarial method Project Unit Credit Method
{*) Pension fund of Board of Direclors
In accordance with the accounting policy described in Note 2.18, the discount rate used to calculate the actuarial
“present value of the pensions and health caré defined benefits, was détermined at the balance sheet daté considéring ` (i) the evolution of the main indexes related with high quality corporate bonds and (ii} the duration of the liabilities. The expected return on plan assets is based on the long term expected return for each asset class within the portfolio of the pension funds and takes in consideration the investment strategy determined for the funds.
During 2013, the legal retirement age in Portugal, for active employees under the Social Security Regime, went from 65 years to 66 years of age. However, the Group plan remained unchanged with retirement age at 65 years old. Therefore, the change in the legal retirement age has an impact in the amount of the Group defined benefit obligation due to the reduction of the participation of the Social Security Regime.
F-56
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The contributions to SAMS as at 31 December 2013 and 2012 corresponded to 6.596 of total wages. The percentage of contribution is established by SAMS, and no changes are expected for 2014.
The number of persons covered by the plan is as follows:
31.12.2013 31.12.2012
Employees 5921 6 337 Pensioners and widows 6 013 5908 Total 11 934 12 245
The amounts recognised in the balance sheet following the application of IAS 19 as at 31 December 2013 and 2012 are presented as follows:
31.12.2013 31.12.2012 (in thousands of eura)
Assets / (liabilities) recognised in the balance sheet
Defined benefit obligation
Pensioners (487491) (448 265} Employees (858 518) (792037) (1346 005) (1 240 302)
Coverage Fair value of plan assets 1346 019 1259 117 Net assets in balance sheet (see Note 35) 10 18 815
Remeasurements recognised in other comprehensive income 1196 453 1089323
Additionally, for the insurance entities of the Group, Tranquilidade and Esumédica have transferred part of their liabilities to BES Vida, through the acquisition of the life insurance policies. The number of pensioners covered by these policies is 359 (31 December 2012: 388), and the total liability amounts to euro 11.2 million (31 December 2012: euro 11.8 million).
Tn accordance with accounting policy described in Note 2.18 and following the requirements of IAS 19 — Employees benefits, the Group assesses, when applicable, at each balance sheet date and for each plan separately, the recoverability of the recognised assets in relation to the defined benefit pension plans based on the expectation of reductions in future contributions to the funds.
F-57
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The changes in the defined benefit obligation can be analysed as follows:
31.12.2013 31.12.2012
(iu thousands of euro)
Defined benefit obligation as at 1 January 1 240 302 1117 094 Service cost 13 659 14325 Interest cost 55 775 58994 Plan participants' contribution 3 260 3 259 Remeasurements:
- changes in actuarial assumptions 94 593 65 148
- experience adjustments (24 641) 42 066 Pensions paid by the fund (34 116) (31288) Benefits paid by the Group ( 104) ( 118) Settlement ofthe defined benefit obligation for insurance employees - (5044) Negative past service costs - (21 813) Exchange differences and other (2719) (232D Defined benefit obligation as at 31 December | 1 346 009 1 240 302
In accordance with the labour agreement for the insurance employees, in force since 1 January 2013, a curtailment of the defined benefit plan has been determined and a defined contribution plan has been established. The related defined benefit obligation recognised as at 31 December 2012 was settled by the fund’s through an initial contribution to the defined contribution plan.
During the year ended 31 December 2012, following the amendment to Decree Law 133/2012 which determines the calculation method for the death allowance, there was a reduction on the defined benefit obligation with this benefit, in the amount of euro 21.8 million, which qualifies as a negative past cost (a gain). On this basis and in accordance with the accounting policy described in Note 2.18, this gain should be recognized in the income statement during the vesting period. Considering that this benefit is already vested (given that the employee or retiree is entitled to the benefit in full without the need to comply with any service condition), the Group recognized the gain in the income statement.
Based on the position as at 31 December 2013, for certain changes in actuarial assumptions, the following impacts would occur:
* An increase in the discount rate by 25 basis points would reduce the benefit obligation by approximately euro 5] million; a decrease of equal magnitude would increase the benefit obligation by approximately euro 58 million;
e An increase of 25 basis points in the growth of salaries and pensions would increase the benefit obligation by approximately euro 62 million; a decrease of equal magnitude would reduce the benefit obligation by approximately euro 51 million;
* The use of mortality tables with increase of another year would increase the benefit obligation by approximately euro 44 million; with a reduction of one.year the benefit obligation would decrease by approximately euro 37 miilion.
F-58
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The change in the fair value of the plan assets in 2013 and 2012 is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Fair value of plan assets as at 1 January 1259 117 1 226 393 Actual retum on plan assets
Expected return on plan assets 54 146 64 328
Actuarial gains/ (losses) (37 250) ( 82 946) Group contributions 103 806 86 410 Plan participants' contributions 3260 3259 Pensions paid by the fund (34 116) (31288) Settlement of the defined benefit obligation for insurance employees - (5044) Exchange differences and other (2944) ( 1 995) Fair value of plan assets as at31 December 1346 019 1259 117
On the presumption that actuarial and financial assumptions used in 2013 for the calculation of the defined benefit obligation are verified, the Group does not anticipate the need to make significant additional contributions for the pension fund in 2014.
Pension fund assets are analysed as follows:
31.12.2013 31.12.2012
Shares and other variable income securities 2296 1596 Fixed income securities 25% 27% Real estate 32% 30% Other 21% 28%
100% 100%
ee
The real estate assets rented to the Group and securities issued by Group companies which are part of the pension fund assets are analysed as follows:
31.12.2013 31.12.2012
(in thous aids of euro)
Shares and other variable income securities 2925 1200 Fixed income securities 1839 6 603 Real cstate 227 469 298 022 Total 232 233 305 825
F-59
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the fund holds participation units of ES Ventures III Fund, which is fully consolidated in the Group.
During the year ended 31 December 2012 the Group acquired 49 779 and 37 115 thousand units of Fungere Fund and Fungepi Fund to the Group pensions funds, by an amount of euro 158.1 million and euro 87.2 million, respectively (see Note 49).
The changes in the remeasurements recognised in other comprehensive income in 2013 and 2012 are analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Remeasurements recoguisedin other comprehensive income as at 1 January 1089 323 899 844
Remeasurements:
-changes in actuarial assumptions 94 593 65 148 - experience adjustments 12 609 125 012 Other ( 72) ( 681}
Remeasurements recognised in other comprehensive income as at 31 December 1 196 453 1089 323 The net benefit cost can be analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Service cost 13 659 14 325 Net interest expense / (income) 1629 (5334) Other [167 ( 212)
Net benefit cost 16 455 8 779
In accordance with the accounting policy described in Note 2.18, since 1 January 2013, due to the change in IAS 19 — Employee Benefits, the net interest expense/ income is recognised in the income statement under Interest and similar income or Interest expense aud similar charges, as applicable.
F-60
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The changes in the assets recognised in the balance sheet can be analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Balance as at 1 January l 18 815 109 299 Net periodic benefit cost (16455) (8779) Negative past service cost - 21 813 Remeasurements recognised on other comprehensive income ( 107 130) (189 479) Contributions of the year and pensions paid by the Group 103 910 86 528 Other 870 ( 567) Balance as at 31 December 10 18 815
Historical information regarding pension plan is as follows:
31.122013 31.122012 31.E2:2011 31.12.2010 31.12.2009 31.12.2008
{in thousands of euro)
Defined benefi obligation (1345009) (124030) ( 17024) (2250 196) 2172293) (2 10400) Fair value of plan asssers 1346019 1259 117 1226 393 2150218 2244926 2101305 (Un)over funded ligtilities 10 18815 109 299 2 72633 (9055) (Giinsytosses from experience adjustments arising on defined benefi obhgation (24641) 42006 (15022) 24639 51958 23855 (Gans Yosses ftom experience adjustments arisinp on phn assets 37250 82946 270 146 63337 (92351) 333 639 Stock options plan
On 1 October 2008, the Company established a stock-optton plan that entitles key management personnel to purchase ESFG shares. Alternatively, the Company may settle (hese options in cash by an amount equivalent to the appreciation of ESFG share market price above the exercise price. Under the program, the Company may grant options to its employees up to 3 000 000 ordinary shares. The exercise price of each option equals the market price of ESFG share on the date of grant and an option's maximum term is of 10 years. Options are granted at the discretion of the Board of Directors and have a vesting period of 1 year.
As at 31 December 2013, all options under the plan have vested. Considering the terms and conditions of the plan and ESFG's informal practices of settling the options granted to
employees in cash, it is accounted for as cash-settled share-based payment arrangement, in accordance with the accounting policy described in Note 2.18.
F-61
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The number and weighted average exercise prices of share options are as follows:
31.12.2013 31.12.2012 Weighted Weighted average Number of average Number of exercise price options exercise price options (in Euro) (in Euro) Outstanding as at 1 January 13.20 2 650 000 13.20 2 650 000 Outstanding as at 31 December 13.20 2 650 000 13.20 2 650 000
Exercisable as at31 December 13.20 2 650 000 13.20 2 650 000
The options outstanding at 31 December 2013 have a remaining contractual life of approximately 5 years (31 December 2012: 6 years).
The plans” initial fair value was calculated using an option valuation model with the following assumptions:
Initial reference date 01.10.2008 Final reference date 01.10.2018 Number of options 2 940 000 Exercise price (in EUR) 13.20 Interest rate 4.2796 Initial spot price (in EUR) 10.33 Volatility 26.47% Initial fair value ofthe plan (in thousands) 4 783
The assumptions used in the valuation of the oulstanding options as at 31 December 2013 and 2012 were the following:
31.12.2013 31.12.2012
Initial reference date 01.10.2008 01.10.2008
Final reference date 01.10.2018 01.10.2018 Number of options 2 650 000 2 650 000 Exercise price (in EUR) 13.20 13.20 Interest rate 1.24% 0.94% Spot price (in EUR) 4.86 5.26 Volatility 15.47% 24.3496
Tn accordance with the accounting policy described in Note 2.18, the initial fair value of the plan, amounting to euro 4 783 thousand, was recognised during the 12 month-period comprised between the grant date and its first anniversary. In 2013 change in the plans” fair value of the benefit granted to employees has been recognised in the income statement, as a decrease in staff costs, for an amount of euro 183 thousand (31 December 2012: euro 97 thousand increase in staff costs).
The fair value of the liability recognised is remeasured at the balance sheet date, amounting as at 31 December 2013 to euro 2 thousand (2012: euro 185 thousand) (see Note 44).
F-62
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 341 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Variable remuneration payment plan on financial instruments (PRVIF)
Following the recommendations of the Supervising and Regulatory authorities, on the BES shareholders General Meeting, held in 6 April 2011 it was approved a new remuneration policy for the Executive Committee members. This policy consists in giving to the Executive Committee members a fixed remuneration, which should represent approximately 4596 of the total remuneration, and a variable component representing around 5594 of the total remuneration. The variable remuneration shall have two components: one associated with short-term performance and another with medium-term performance. Half of the short-term component must be paid in cash and the remaining 50% should be paid over a three years period, with half of these payments to be made in cash and the remaining through the attribution of shares. The medium-term component has associated a share options program with the exercise of the opttons set at 3 years from the date of its attribution.
Regarding the first scheme, the attribution of PRVIF shares to the beneficiaries is performed on a deferred basis over a period of three years (1st year: 33%; 2nd year: 33% and 3rd year: 34%) and is subject to the achievement of a Return on Equity (ROE) greater than or equal to 5%.
Regarding the attribution of options to the beneficiaries is also performed by the Remuneration Committee, and the exercise price is equal to the single average of the closing prices of BES shares on NYSE Euronext Lisbon during the 20 days preceding the day of attribution of the options, plus 10%. The option can only be exercised at maturity and the beneficiary may choose between the physical settlement or the financial settlement of the options.
The plans” initial fair value was calculated using an option valuation model with the following assumptions:
1º attribution 2™ attribution Initial reference date 12.04.2011 12.10.2012 Final reference date 31.03.2014 15.01.2016 Rights granted to employees 2 250 000 6 280 045 Reference price (in EUR) 3.47 0.67 Interest rate 231% 0.67% Volatility 40,0% 65.0% Initial fair value of the plan (in thousands of euro) 1 130 1 940
PRVIF is accounted for in accordance with the applicable IFRS rules (IFRS 2 and IAS 19). During 2013, the Group registered, against liabilities, a cost of euro 925 thousand (31 December 2012: euro 489 thousand) related to the amortization of the initial options premium granted.
F-63
ESPIRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Long term service benefits
As referred in Note 2.18, for employees that achieve certain years of service, the Group pays long term service premiums, calculated based on the effective monthly remuneration earned at the date the premiuins are due. At the date of early retirement or disability, employees have the right to a premium proportional to that they would eam if they remained in service until the next payment date.
As at 31 December 2013 and 2012, the Group's liabilities regarding these benefits amount to euro 30 376 thousand and euro 28 691 thousand, respectively (see Note 44). The costs incurred in the year with long term service benefits amounted to euro 4 560 thousand (31 December 2012: euro 3 002 thousaud) (see Note 13).
"The actuarial assumptions used in the calculation of the liabilities are those presented for the calculation of pensions (when applicable).
NOTE15- GENERAL AND ADMINISTRATIVE EXPENSES
This balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Rental costs 85 261 80 804 Communication costs 47 966 50 190 Traveling and representation costs 38 437 39 752 Advertising costs 39 436 42 848 Maintenance and related services 29 353 27 656 Insurance costs 10 276 8711
Specialised services IT services 67 329 70 617 Professional services 21351 15 928 Temporary work 5 146 5 550 Electronic payment system I0 172 11711 Legal costs 23 008 20 910 Consultants and external auditors 33 844 32 198 Other specialised services 3033 3 756 Water, energy & fuel I4 044 13 49] Current consumption material 5 376 5 726 Transports 7 538 7 899 Other costs 76 506 65 013 518 076 502 760
The. balance “Other specialised services" includes, among others, -costs with security, information services and databases. The balance “Other costs" includes costs with training and external suppliers.
F-64
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The fees billed to the Company by KPMG Luxembourg S.à r.l. and other member firms of the KPMG network (“KPMG”) during the year are analysed as follows (excluding VAT):
31.12.2013 31.12.2012
(in thousands of euro)
Audit fces 3708 3 786 Audit related fees 1871 1 508 5 579 5 294
Taxconsultancy services 644 773 Other services 688 504 6911 6571
———
The outstanding lease instalments related to the non-cancellable operational lease contracts are analysed as follows: 31.12.2013 31.12.2012
(in thousands of euro)
Up to 1 year 2 803 8 903 l to 5 years 11 263 10 451 14 066 19 354
NOTE 16 - CLAIMS INCURRED, NET OF REINSURANCE
Claims incurred, net of reinsurance are analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro) Claims incurred for the life business 301 490 434 248 Claims incurred for the non-life business 181 728 197 695 483218 631 943
F-65
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Concerning the life business, the claims incurred, net of reinsurance are analysed as follows:
31.12.2013
31.12.2012
(in thousands of euro)
Claims paid
Gross amount 304 724 Reinsurance share (14 388) 290 336
Change in claims outstanding reserve Gross amount 12 938 Reinsurance share (1784) 11 154 301 490
Concerning the non-life business, the claims incurred, net of reinsurance are analysed as follows:
439 480 (3239)
436 241
(1532) ( 461)
(1993)
434 248
31.12.2012
(in thousands of euro)
31.12.2013 Claims paid Gross amount 234 802 Reinsurance share (22957) 211 845 Change in claims outstanding reserve Gross amount (30 855) Reinsurance share 738 (30117) 181 728
F-66
224 071 (14 527)
209 544
(6851) (4998)
(11 849)
197 695
=—
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The gross amount of claims paid and change in claims reserve for the non-life business are as follows:
31.12.2013 31.12.2012 ` Change in 1 : Change in Claims paid claims reserve "Total Claims paid claims reserve Total (in thousands of curo) Direct business
Accident and health 73335 13 335 86 670 75 145 7 108 92253 Fire and other hazards 44 134 (8149) 35985 28957 12 403 41 360 Motor 109 603 (35617) 73986 111i 609 (28283) 83 326 Manilime, airline and transportation 2562 134 2696 3 124 ( 175) 2949 Third party liability 3437 (1897) 1540 4 085 1966 6051 Credit and suretysinp 23 ( 38) ( 15) C13 44 31 Other 1361 1401 2762 1159 27 1 186 Reinsurance accepted 347 ( 24) 323 5 59 64 "Total 234 802 (30 855) 203 947 224 071 (6 851) 217220
a SI
NOTE 17 - CHANGE IN THE TECHNICAL RESERVES, NET OF REINSURANCE
The change in the technical reserves, net of reinsurance is analysed as follows:
Life business Non-life business
31.12.2013 31.12.2012
(in thousands of euro)
150 757 (333 638) 2574 (3 022) 153 331 (336 660)
= oo
Concerning the life business, the changes in the technical reserves are analysed as follows:
Change in life assurance reserve Gross amount Reinsurance share
Reserve for bonus and rebates Gross amount Reinsurance share
Change in other life insurance reserve Gross amount
F-67
31.12.2013 31.12.2012
(in thousands of euro)
154 689 (332 486) (1) 402
154 688 (332 084) 3719 4 623 (8395) _ (3213) (4 676) 1 410 745 (2964)
745 (2964)
150 757 (333 638)
——
ESPÎRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Concerning the non-life business, the changes on the technical reserves are analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Change in non life insurance reserve Change in unexpired risk reserve 2574 (3022)
2574 (3 022)
E EE SS
NOTE 18- INSURANCE COMMISSIONS
The insurance commissions are analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro)
Direct insurance commissions
Acquisition commissions and other costs 43 739 45 295 Change in deferred acquisition costs 733 567 Collection commissions 1912 1959 Reinsurance commissions (a) (198 640) (8 565) (152 256) 39 256
(a) Commissions and reinsurance profit sharing includes the net upfront fee, resulting from the signing of a reinsurance treaty in which BES Vida reinsures the life insurance risk portfolio at 100%, including all insurance policies in force as at 30 June 2013.
From this date, BES Vida will cede to the reinsurer all premituns and claims associated with the policies included in this treaty. The Company will perform the servicing of these contracts, as well as the distribution of ihe respective products.
Under this treaty, BES Vida received an upfront fee, having transferred all the risks and benefits associated with these contracts. On that basis, the risk of (i) life, (11) disability, and (iii) cancellation of contracts were transferred. As such the upfront fee is recognized on the present date, net of the respective in force value of the portfolio recognized as an asset, at the date of acquisition of BES Vida (see Notes 32 and 55).
F-68
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCTAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE19- EARNINGS PER SHARE
Basic earnings per share Basic earnings per share, is calculated by dividing the net profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the year.
31.12.2013 31.12.2012
(in thousands of curo)
Consolidated result attributable to equity holders of the Company (864 031) 313 633
C) Dividends on preference shares (5169) (5965) (-) Remuneration of perpetual bonds ( 600) ( 519) (+) Realized gains and losses recognized in Reserves 3481 H 524 Adjusted consolidated result attributable to equity holders of the Compauy (866 319) 318 673
Average nuniber of oustanding shares 207 075 338 174 813 327 Average number of treasury shares (2 179 856) (3 736 030) Average number of shares in circulation 204 895 482 171 077 298 Basic earnings per share attributable to the equity holders of the Company (in eura) (4.23) 1.86
Basic carnings per share from continuing operations attributable ta the equity
4.19 KU holders of the Company (in euro) (4.19) 19
The weighted average number of shares outstanding was calculated taking in consideration the capital increase occurred in the year as described in Note 45.
Diluted earnings per share
The diluted earnings per share is calculated considering the profit attributable to the equity holders of the Company and the weighted average number of ordinary shares outstanding, adjusted for the effects of all dilutive potential ordinary shares,
The dilnted earnings per share are not different from the basic eamings per share,
F-69
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE20- CASH AND DEPOSITS AT CENTRAL BANKS As at 31 December 2013 and 2012, this balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Cash 289 349 304 410
Deposits at central banks Bank of Portugal 32 did 26 799 Other central banks 1506911 1 113 622 1539325 1140421
1 828 674 1 444 831
The deposits at Central Banks include mandatory deposits intended to satisfy legal minimum cash requirements, for an amount of euro 496 582 thousand (31 December 2012: euro 39 599 thousand). According to the European Central Bank Regulation no. (348/2011, of 14 December 2011, minimum cash requirements kept as deposits with the Bank of Portugal earn interest and correspond to 1% of deposits and debt certificates maturing in less than 2 years, excluding deposits and debt certificates of institutions subject to the European System of Central Banks' minimum reserves requirements. During 2013, these deposits have earned interest at an average rate of 0.55% (2012: 0.8994).
The fulfilment of the minimum cash requirements for a given period of observation is monitored taking into account the value of bank deposits with the Bank of Portugal during the referred period. The balance of the bank account with the Bank of Portugal as at 31 December 2013, was included in the observation period from 11 December 2013 to 14 January 2014, which corresponded to an average minimum cash requirements of euro 265.1 million.
F-70
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated}
NOTE21- DEPOSITS WITH BANKS
As at 31 December 2013 and 2012, this balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Deposits with banks in Portugal
Repayable on demand 214 761 371 794 Uncollected cheques 85 164 107 354 Other 73 552 57 010 373 477 536 158 Deposits with banks abroad
Repayable on demand 740 603 547 823 Uncollected cheques 3 564 8 962 Other 31 290 33910 775 457 590 695
1 148 934 1126 853
Uncollected cheques in Portugal and abroad were sent for collection during the first working days following the reference dates.
Other deposits with banks, in Portugal and abroad, mature within 3 months. Deposits with banks include the amount of euro 173 426 thousand (31 December 2012: euro 195 586 thousand)
related to deposits held by securitisation vehicles consolidated by the Group and that collateralise the debt issued in the scope of the respective securitisation transactions (see Note 1).
F-71
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCTAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE22- FINANCIAL ASSETS AND LIABILITIES HELD FOR TRADING
As at 31 December 2013 and 2012, this balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Financial assets held for trading
Securities Bonds and other fixed income securities
Issued by government and public entities 955 951 1 395 583 Issued by other entities 105 270 265 057 Shares 30 903 52281 Other variable income securities 1701 2 181 1093 894 1715 102
Derivatives Derivative financial instruments with positive fair value 1394 571 2 266 743 2 488 465 3981 845
=
Financial liabilities held for trading
Derivatives Derivative financial instruments with negative fair value 1 322 284 2 123 429
Short selling 14 484 796
1336 768 2124225
During the year 2008, the Group has reclassified from financial assets held for trading an amount of eura 244 530 thousand to held-to-maturity investments (see Note 27), following an amendment to IAS 39 Financial Instruments: Recognition and Measurement issued in October 2008 and adopted by the European Union in that year.
As at 31 December 2013 and 2012, the amounts that would have been recognised in the year if the reclassifications were not made are presented as follows: 31.12.2013 31.12.2012 (in thousands of euro)
Net gains / (losses) from financial assets and financial liabilities at fair value
through profit or loss ( 217) 947 Taxeffect 147 ( 73) ( 70) . 874
F-72
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012 the analysis of the securities held for trading by the period to maturity, is presented as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Up to 3 months 42 034 139 663 3 to 12 months 106 046 173 705 1 to 5 years 611 659 765 803 More than 5 years 301 485 577 774 Undetermined 32 670 58 157
1 093 894 1715102
In accordance with the accounting policy described in Note 2.6, securities held for trading are those which are bought to be traded in the short-term, regardless of their maturity.
The balance Financial assets held for trading includes securities pledged as collateral by the Group as described in Note 47. `
As at 31 December 2013 and 2012, the exposure to peripheral Euro zone countries public debt is analysed in Note 53.
Regarding quoted and unquoted securities, the balance financia! assets held for trading is as follows:
31.12.2013 31.12.2012 Quoted Unquoted Total Quoted Unquoted "Total
(in thousands of euro)
Bonds and other fixed income securities
Issued by govemnænt and public entities 955 95] - 955951 1349 507 46 076 1395 583 Issued by other entities 85283 19 996 105 279 100 506 164 551 265 057 Shares 30 894 69 36 963 40 505 11776 52281 Other variable income securities 1598 103 1 701 2181 - 2181
1073726 20 168 1 093 894 1492699 222 403 1715 102
cE
Valuation techniques are described in Note 52.
F-73
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, derivative financial instruments can be analysed as follows:
31.12.2013 31.12.2012 Fair value Fair value
Notional — Noti —_ Oe ` Assets Liabilities Notional Assels Liabilities
(in thousands of euro)
Exchange rate contracts
Forward - buy 2019 187 1356 880 sell 1863 106 25972 10 152 1 226 020 7688 12871 Currency Swaps -buy 1561 513 3070 568 - sell 1638 391 1757 2198 3352944 im 2019 Currency Futures 2771 168 - - 278 317 E - Currency Interest Rale Swaps - buy 61 108 | 118 945 «sell 63040 14 945 12 839 115406 25690 18343 Currency Options 2813981 27316 25 144 2414 534 41 437 46 868 12 791 494 69 990 50333 11 933 614 76786 80 101 Interest rate contracts Forward Rate Agreements 310 000 79 - 200 000 - 16 Interest Rate Swaps 24 204 535 1202 350 1070 130 3T 000 725 1954 185 1814 293 Swaption - Interest Rate Options 2000 28 286 - 363 090 1556 1556 Interest Rate Caps & Floors 3378 746 - 26 871 4918 557 40 843 38 562 Interest Rate Futures 4 436 679 H - 3784 771 - E Interest Rate Options 870 288 330 328 1903 388 1341 1341 33 202 248 1231 045 1097 335 42 170 441 1957 925 1855 768 Equityfindex contracts Equity / Index Swaps 581623 23273 42 538 664 516 86 202 24 936 Equity / IndexOptions 1107 223 35 423 113 691 2715219 60 917 131 146 Equity / Index Futures sa a - - 96 583 - - Future Opiions 395 420 - - 82234 - - 2 137 384 58 696 156 229 3 558 552 147 119 156 082 Credit default contracts Credit Default Swaps 1264 196 34 840 18387 2774779 44913 31478
49395 322 1394 571 1322 284 60 437 386 2266743 2123 429
As at 31 December 2013 the fair value of derivative financial instruments included the amount of euro 4.2 million (asset) (31 December 2012: asset for an amount of euro 21.1 million) related to the positive fair value of the embedded derivatives, as described in Note 2.4.
F-74
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the analysis of trading derivatives by the period to maturity is presented as follows:
31.12.2013 31.12.2012 Notional Fair value Notional Fair value
(in thousands of euro)
Up to 3 months 9 360 505 (25 628) 13 785 652 71751 From 3 to 12 months 7 894 937 17 071 10 093 874 (46 802) From 1 to 5 years 16 739 075 (15 908) 19 007 557 21 130 More than 5 years 15 400 805 96 752 17 550 303 97 235 49 395 322 72 287 60 437 386 143 314
= em
NOTE23- OTHER FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS As at 31 December 2013 and 2012, this balance is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Bonds and other fixed income securities
Issued by government and public entities 1 234 847 516 859 Issued by other entities ] 229 467 956 370 Other variable income securities 1099 804 1130234 3 564 118 2 603 463
In light of IAS 39 and in accordance with the accounting policy described in Note 2.6, the Group designated these financial assets as at fair value through profit or loss, in accordance with the documented risk management and investment strategy, considering that these financial assets (1) are managed and evaluated on a fair value basis and/or (ii) have embedded derivatives.
Ás at 31 December 2013 and 2012, the analysis of the financial assets at fair value through profit or loss by the period to maturity 1s presented as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Up to 3 months 599 455 355 219 3 to 12 months F 029134 203 772 1to 5 years 335 141 226 286 More than 5 years 522 334 738 358 Undetermined 1078 054 1079 828
3 564 118 2 603 463
Regarding quoted or unquoted securities, the balance financial assets at fair value through profit or loss, is presented as follows:
F-75
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
31.12.2013 31.12.2012
Quoted VUnquoted Total Quoted Unquoted "Total
Gn thousands of euro)
Bonds and other fied income securities
Issued by government and public entities 1234 847 H 1234 817 516 859 - 516 859 Issued by other entitics 493999 735 468 1229 467 240 984 715 386 956 370 Shares and other variable income securilies 620 293 479511 1099 801 566 440 563794 1130234 2349 139 1214979 3564 118 1324283 1279180 2 603 463 E ———— ————— —— NOTE 24 - AVAILABLE-FOR-SALE FINANCIAL ASSETS
As at 31 December 2013 and 2012, this balance is analysed as follows:
Fair value reserve td ———— TD Book Cost (1) Positive Negative Impairment ook value (in thousands of euro)
Bonds and other fixed income securities
Issue by govemment and public entities 4098 171 26 568 (24 942) - 4099 797 Issue by olhers entities 2255951 61 187 (44 473) (33953) 2238712 Shares 1394 322 83075 (84 184) (213 501) E179 712 Other securities 1472944 18 353 (9 149) (70 591) 1411557 Balance as at 31 December 2013 9221388 189 183 (162 748) (318 045) 8929 778 E MÀ E — 3 Bonds and other fixed income securities Issue by govemment and public entities 4 297 879 201 930 (1801) C11) 4 497 997 Issue by alhers entities 4273021 62 357 (91219) (18 208) 4225951 Shares 1557 620 82412 (59 579) (200 299) 1380 154 Olher securities 961 638 16 562 {5 444) {35 623) 937 133 Balance as at31 December 2012 11 090 158 363 261 (158 043) (254 141) 11 041 235 = — — —
o Acquisition cost relating to shares and other variable income securilies and amortised cost relating to debt securities. As at 31 December 2013, the exposure to debt of peripheral countries in the euro area is analysed in Note 53.
The balance Available-for-sale financial assets includes securities pledged as collateral by the Group as described in Note 47.
During the year 2008, the Group has reclassified from available-for-sale financial assets an amount of euro 522 715
thousand to held-to-maturity investments (see Note 27), following an amendment to IAS 39 l'inancial Instruments: Recognition and Measurement issued in October 2008 and adopted by the European Union in that year.
F-76
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the amounts that would have been recognised in the year if the reclassifications were not made are presented as follows:
31.12.2013 31.12.2012 (iu thous auds of euro) Net change in fair value reserve (1014) (3 780) Taxeffect 294 1 191 ( 720) (2 589)
During the second quarter of 2011, taking in consideration the new solvency rules applicable to the insurance industry in Portugal, in-force from 1 January 2011, the insurance entities of the Group have reclassified from available-for-sale financial assets an amount of euro 150 253 thousand to held-to-maturity investments (see Note 27), in accordance with LAS 39 Financial Instruments: Recognition and Measurement.
As at 31 December 2013 and 2012, the amounts that would have been recognised in the year if the reclassifications were not made are presented as follows:
31.12.2013 31.12.2012 (in thousands of euro) Net change in fair value reserve 22 090 18 901 Tax effect ( 6 406) (5481) 15 684 13 420
In accordance with the accounting policy described in Note 2.6, the Group assesses periodically whether there is objective evidence of impairment on the available-for-sale financial assets, following the judgment criteria's described in Note 3.1.
The changes occurred in impairment losses of available-for-sale financial assets are presented as follows:
31.12.2013 31.12.2012 (in thousands of euro) Balance as at I January 254 141 192 073 Charge for the year 121 608 103 261 Charge off ( 44 300) (36 163) Write back for the year ( 11178) (3 943) Exchange differences and other (2226) (1087) Balance as at31 December 318 045 254 141
F-77
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the analysis of available-for-sale assets by the period to maturity is presented as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Up to 3 months ] 284 223 2 841 838 From 3 to 12 months 729 897 1 244 222 From Ito 5 years 1 681 503 I 475 813 More than 5 years 2 688 229 3 188 324 Undeterinined 2 545 926 2 291 038
8929 778 11 041 235
The main equity exposures that contribute to the fair value reserve, as at 31 December 2013 and 2012, can be analysed as follows:
31.12.2013 Amortised Fair value reserve . «Ss Impairment Market value cost Positive Negative
(in thousands of euro)
Portugal Telecom 346 678 - (62 407) (37) 284 234 EDP 20 121 4 999 - - 25 120 Banque Marocaine du Commerce Extérieur 81 004 2424 - - 83 428 447 803 7 423 (62 407) (37) 392 782 31.12.2012 Amortised Falr value reserve
t m Impairment Market value cos Positive Negative
(in thousands of euro)
Portugal Telecom 346 637 - (10757) - 335 880 EDP 173 826 24 447 ` - 198 273 Banque Marocaine du Commerce Extérieur 81 004 - (15813) - 65 191
601 467 24 447 (26 570) - 599 344
During the year ended 31 December 2013, the Group sold at market prices 77.4 million ordinary shares of EDP, which generated a realised net gain of euro 53.7 million (euro 14.7 million net of non-controlling interest) (see Note
8).
During the year ended 31 December 2012, the Group sold at market prices 96.4 million ordinary shares of EDP and 260.7 million ordinary shares of Portugal Telecom. These transactions generated a realised net loss of euro 224.9 million (euro 61.5 million net of non-controlling interest) (see Note 8).
Following the market transactions with Portugal Telecom shares, the portfolio average price has reduced significantly. The unrealised losses presented in the fair value reserve at year end, represent a recent decline in value that occurred after the Group having recognised positive fair value reserves in the first and second quarter of 2013. The unrealised losses recorded at year end represent 1896 of the investment,
F-78
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnis expressed in thousands of euro, except when indicated)
The analysis of the available-for-sale financial assets by quoted and unquoted securities, is presented as follows:
31.12.2013 31,12,2012 Quoted Unquoted Total Quored Unquoted “Tojal (in thousands of euro) Securities
Bonds and other fred income securities
Issue by government and public entities 2 960 469 1 139 328 4099 797 3204 546 1293 451 4497 997
Issue by other entities 932 457 1306 255 2238 712 998414 3227 537 4225951 Shares 541 885 637 827 1179712 788 266 591 338 1380154 Other variable income securities 707 943 703 614 1411 557 376659 560474 937 133
5 142 754 3787 024 8929 778 5367885 5 673 350 11 041 235
L—
Valuation techniques have been disclosed in Note 52.
NOTE 25 - LOANS AND ADVANCES TO BANKS
As at 31 December 2013 and 2012 this balance is analysed as follows:
31,12.2013 31.12.2012
(in thousands of euro) Loans and advances to banks in Portugal
Deposit to Bank of Portugal 3 987 961 3 350 000 Deposits 169 508 44 372 Loans 20 037 [27 581 Very short term deposits - 34 085 Other loans and advances 1 165 84 474 4 178 671 3 640 512
Loans and advances to banks abroad Deposits 101 421 271 281 Loans 457 978 533 798 Very short term deposits 12 976 32 696 Other loans and advances 77014 70 324 649 389 908 099 Overdue loans and interest 398 398 4 828 458 4 549 009 Impairment losses ( 668) ( 762) 4 827 790 4 548 247
The main loans and advances to banks in Portugal, as at 31 December 2013 bear interest at an average annual interest rate of 1.46% (31 December 2012: 1.73%). Loans and advances to banks abroad bear interest at an average annual interest rate of 0.24% (31 December 2012: 0.88%).
F-79
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the analysis of loans and advances to banks by the period to maturity is presented as follows:
31.12.2013 31.12.2012 (in thousands of euro)
Up to 3 months 4 508 241 4 178 481 3to 12 months 225 381 96 657 Lto 5 years 27 569 79 623 More than 5 years 66 867 193 777 Undetermined 400 471 4 828 458 4 549 009
The changes occurred during the year in impairment losses of loans and advances to banks are presented as follows:
31.12.2013 31.12.2012 (in thousands of euro) Balance as at 1 January 762 617 Charge for the year 306 1 366 Write back for the year ( 386) (1207) Exchange differences and other ( 14) ( 14) Balance as at 31 December 668 762
F-80
NOTE 26 -
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Domestic loans
Corporate Loans Commercial lines of credits Finance leases Discounted bills Factoring Overdralis Other loans
Retail Mortgage loans Consumer and other loans
Foreign loans
Corporate Loans Commercial lines of credits Discounted bills Finance leases Overdrafts Other loans Retail Mortgage loans Consumer and other loans
Overdue loans and interest
Up to 3 months
From3 months to 12 months From | to 3 years
More than 3 years
Impairment losses
LOANS AND ADVANCES TO CUSTOMERS
As at 31 December 2013 and 2012, this balance is analysed as follows:
F-81
31.12.2013
31.12.2012
(in thousands of euro)
12 946 588 4635 722 2215 135
306 776
1 048 434 53618 154 406
9 603 399 1 509 100
32 563 178
11 636 269 2061 420 87 107
62 424 910 599 457 106
1012412 825 057
17 052 394
254 551 713 612 1357 024 775 983
3101 170 52 716 742 (3 446 075)
49 270 667
12 675 007 5247361 2 560 541
454 624 1412114 78 057 102 193
10 067 167 ] 750 980
34 348 044
11 130 067 2 [81 087 145 877 60732 679 516 795 230
964 325 831 483
16 797 517
293 307 608 [71 793 912 586 553
2281 943 53 427 504 (2 734 626)
50 692 878
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED VINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013, the balance loans and advances to customers (net of impairment) includes an amount of euro 3 253.5 million (31 December 2012: euro 3 803.3 million} related to securitised loans following the consolidation of the securitisation entities (see Note 50), according to the accounting policy described in Note 2.2. The liabilities related to these securitisations are booked under Debt securities issued (see Notes 39 and 50).
As at 31 December 2013, loans and advances include euro 5 552.6 million of mortgage loans that collateralise the issue of covered bonds (31 December 2012: euro 5 605.1 million) (see Note 39).
The fair value of loans and advances to customers is presented in Note 52.
As at 31 December 2013, loans and advances include a portfolio of loans granted which are under a sovereign guarantee, in the amount of euro 4 133 million.
As at 31 December 2013 and 2012, the analysis of loans and advances to customers by the period to maturity is presented as follows:
31.12.2013 31.12.2012 (in thousands of euro) Up to 3 months 8 107 983 9234 034 3 to 12 months 6 465 614 6 824 493 Ito 5 years 10 722 354 10 602 697 More than 5 years 24 319 621 24 484 337 Undetermined 3 101 170 2281 943 52 716 742 53 427 504
The changes occurred in impairment losses of loans and advances to customers are presented as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Balance as at 1 January 2 734 626 2 212 144 Charge ofthe year 1462 574 1021 570 Charge off (211811) (212 173) Amounts recovered during the year previously charged-off 21 063 21 900 Write back ofthe year (457281) (227 279) Unwind of discount ( 103 082) (78 290) Exchange differences and others ( 14) (3246)
Balance as at31 December 3 446 075 2 734 626
The unwind of discount represents the interest on overdue loans, recognised as interest and similar income, as impairment losses are calculated using the discounted cash flows method.
F-82
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, loans and advances to customers and impairment losses can be analysed as follows:
31.12,2013 ne Loans with impairment losses Loans with impairnient losses Totat calculated on an individual basis calentated on à portfolio basis Gross , Gross . Gross 1 z amount TInipairment amount Impairment amount Impairment Net amount (in thousands of euro) Corporate loans 13 547 509 2 869 601 25 806 654 181 726 39354 163 3051327 36 302 836 Mortgage loans 2348771 175325 8 465 955 10538 10814 726 185 863 10 628 863 Consumer and other loans 599 765 199316 1948 083 9569 2 547 853 208885 2338 068 "Total 16 496 045 3244242 36 220697 201 833 52716 742 3 446 075 49 270 667 —== m = ee 31.12.2012 a Im mMm Loans with impalrment Toss es Loans wih impairment losses Total calculated on an individual basis calculated on a portfolio Insts Gross ` Gross : Gross 1 amount Impairment amount Tupairment amount Impairment Netamount tin thonsands of euro) Corporate loans 12 617 103 2231 936 26 898 334 150917 39515437 2382853 31132584 Morigage loans 2362 525 160 135 8711 297 6884 11 133 822 167 019 10966 803 Consumer and other loans 587 892 172 563 2 190 353 12191 2778 245 184 754 2 593 491 Total 15 567 520 2 564 634 37 859 984 169 992 53427 504 2734 626 50 692 878
——
The impairment calculated on an individual basis corresponds to the impairment related to loans with objective evidence of impairment and to loans classified as "Higher Credit Risk". The objective evidence of impairment occurs when there is a default event, i.e., from the moment that a significant change occurs in the lender-borrower relationship and the lender is subject to a loss. The "Higher Credit Risk" corresponds to loans without objective evidence of impairment but that present higher risk signs (e.g. customers with overdue loans for mere than 30 days and less than 90 days; litigations; higher risk rating / scoring; allocated to the Companies Monitoring Department; and restructured loans due to financial difficulties of the borrower and which are not classified as default).
The interest recognised as interest and similar income during the year ended 31 December 2013 in relation to these loans amounted to euro 717.9 million (31 December 2012: euro 825.4 million), which includes the effect of the unwind of discount in connection with overdue loans.
As at 31 December 2013, loans and advances, excluding overdue loans and interest, includes euro 282 696 thousand of renegotiated loans (31 December 2012: euro 221 416 thousand). At the same date, the impairment regarding these renegotiated loans amounted to euro 6 190 thousand (31 December 2012: euro 16 363 thousand). The related interest recognized in the income statement amounted to euro 10 950 thousand (31 December 2012: euro 9 940 thousand). m
The Group requires that some credit operations be collateralised, in order to mitigate credit risk. The more common types of collateral held are mortgages and securities. The fair value of these collaterals is determined at the date the loan is advanced to customers, being periodically updated when the credit is classified as having an impairment trigger. The periodicity of the update considers the risk and size of each loan.
F-83
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The collateral received regarding credit operations can be analysed as follows:
31.12.2013 31.12.2012 Loan Collateral Loan Collateral fair value fair value
(in thousands of euro)
Mortgage loans
Mortgapes 10 600 588 10 578 354 10 951 831 10 930 789 Pledges 3691 3512 4739 d 570 Non-collateralized 210 447 - 177 252 -
10814 726 10 581 866 11 133 822 10 935 359
Retail loans
Mortgages 305 840 287 164 310 561 291 897 Pledges 540 367 535 666 735 255 549 718 Non-collateralized I 705 [29 - 1 732 429 -
2551336 822 830 2778 245 841 615
Corporate Ioans
Mortgages 9 593 702 8 553 238 9812 810 9 122 921 Pledges 7181725 5315025 9281917 6 104 860 Non-collateralized 22 575 163 - 20 420 710 -
39 350 680 13 868 263 39 5[5 437 15 227 781
Loans and advances to customers
Mortgages 20 500 220 I9 418 756 21075202 20 345 607 Pledges 7725 783 5 854 203 10 021 911 6 659 H8 Non-collateralized 24 490 739 - 22330391 -
82 716 742 25 272 959 53 427 504 27 004 755
E
Under the contracts relating to collateral held, the Group cannot sell the underlying assets until these are acquired in exchange for loans. The terms and conditions of these contracts are in line with the market practice relating to credit granting.
F-84
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The amounts relating to loans renegotiated due to financial difficulties of the borrower, are analysed as follows:
31.12.2013
(in thousands of euro)
Corporate 4 113 958 Mortgage loans 201 541 Consumer and other loans 115 445 Non-residents 1 415 421
5846365
The Group carries out a renegotiation of a loan in order to maximize its recovery. A loan is renegotiated in accordance with selective criteria, based on the analysis of the overdue circumstances or when there is a high risk that the loan will became overdue, and the client has made a reasonable effort to fulfil the contractual conditions previously agreed and is expected to have the capacity to meet the new terms agreed, The renegotiation normally includes the maturity extension, changes in the payment dates defined and / or amendment of the contracts’ covenants. Whenever possible, the renegotiation includes obtaining new collaterals. The renegotiated loans are still subject to an impairment analysis resulting from the revaluation of the new expected cash flows, based in the new contract terms, updated at the original effective interest rate and taking into account the new collaterals.
Loans and advances to customers by interest rate type are analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro) Variable interest rate 41 581 173 43 417 949 Fixed interest rate 11 135 569 10 009 555 52 716 742 53 427 504
F-85
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
An analysis of finance leases by the period to maturity is presented as follows: 31.12.2013 31.12.2012
(in thousands of euro) Gross investment in finance leases, receivable
Up to 1 year 364 545 432 202 From | to 5 years 1 022 263 1 130 447 More than 5 years 1 186 455 1373 116 2 573 263 2935 705 Unearned finance income on finance leases Up to 1 year 61 705 68 859 From 1 to 5 years 136 182 157217 More than 5 years 97 817 79 416 295 704 305 492 Present value of minimum lease payments, receivable Up to | year 302 840 363 343 From Í to 5 years 886 081 973 230 More than 5 years 1 088 638 ] 293 700 2277 559 2 630 273 impairment ( 175 104) { 144 097)
2 102 455 2 486 176
As at 31 December 2013 and 2012 there are no finance leases which represent individually more than 5% of the total minimum lease payments. There are no finance leases with contingent rents.
F-86
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE27- | HELD-TO-MATURITY INVESTMENTS
The held-to-maturity investments, can be analysed as follows:
31.12,2013 31.12.2012
(in thousands of euro) Bonds and other fixed income securities
Issued by governinent and public entities
437 778 404 393
Issued by other entities 1247 711 753 765 1 685 489 1158 158
Impairment losses (13 421) (39111)
1672 068 1119 047
As at 31 December 2013 and 2012, the analysis of held-to-maturity investments by the period to maturity is presented as follows: 31.12.2013 31.12.2012
(in thousands of euro) Up to 3 months
596 845 20 561
3to 12 months 66 715 198 989 l to 5 years 496 697 355 029 More than 5 years 525232 583 579 1685 489 1158 158
The analysis of the held-to-maturity investments by quoted and unquoted securities is presented as follows:
Lo 341422043 — 31.12.2012 —Quoted Unquoted ` ` — Total ` __ Quoted ` Unquoted Total — , tin thousands of euro) Bonds and other fixed income securities Issued by government and public entities 435 277 2501 437 778 401 800 2593 404 393 Issued by ather entities 208 735 1038976 1241 741 233033 520 732 753765 644 012 L 041 477 1685 489 634 833 523325 1158 158
F-87
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of enro, except when indicated)
The changes occurred in impairment losses of held to maturity investments are presented as follows:
31.12.2013 31.12.2012 (in thousands of euro) Balance as at 1 January 39 111 34 278 Charge of the ycar - 7260 Charge off (25317) (2 429) W rite back for the year ( 372) - Exchange differences and other (D 2 Balance as at 31 December 13 421 39 111
During the year ended 31 December 2008, the Group has reclassified non-derivative financial assets to the held-to- maturity investments category for an amount of euro 767.2 million, as follows:
Reclassification date Amortisation of equ on Eee | Market value as fair value
t Fair value reserve Future Effective 2131 December il
Book value |, 77.777 m interest 2008 reserve unii
Positive Negative Sash-Moms rate ® 31.122013 c)
{in thousands ofeura) Available-for-sale financial assets 551 897 522715 424 (29 607) 701 070 5754 485 831 26774 Financial assets held-for-trading 243114 244 530 - - 408 976 11,5095 237295
Bonds and other fixed income securittos 795011 767245 324 (29 607) 1110046 723 126 26774
—— el
a) Undiscounted capital and interest cash flows; future interest is caledlated based on the forward inlerest rales at the dete of reclassification.
b) Effective interest rale was calculated based on the fornard inleres! rates al Lhe dale of reclassification; the maturity considered was dhe minimum between the call dete, if applicable and tbe meturily dale of the financial asset
c) Amorlisalien in Lhe year ended 31 December 2013 amount to euro 817 thousand (31 December 2012: euro 862 thousand).
The reclassification of financial assets heid-for-trading as held-to-maturity investments was performed following the amendment to IAS 39 Financial instruments: recognition and measurement and IFRS 7 Financial instruments: disclosures, adopted by the Regulation (EU) n° 1004/2008 issued in 15 October 2008.
This reclassification was made due to the market conditions following the international financial crises that characterised the year 2008, which was considered to be one of the rare circumstances justifying the application of the amendment to IAS 39.
The effect in the 2013 financial statements that would have been recognised if the reclassifications were not made in 2008 is presented in Notes 22 and 24.
Following the publication by the Bank of Portugal, in May 2011 of Notice no. 3/2011, which has established new minimum levels for the Core Tier 1 ratio (9% at 31 December 2011 and 10% in 31 December 2012) and bearing in mind the need to achieve, from 2014 onwards, a stable funding ratio of 100%, according to the Memorandum of Economic and Financial Policies established between the Portuguese Government, the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF}, the Group has decided during the second half of 2011 to sell a significant portion of the held-to-maturity investments portfolio. Under this decision, the securities to be sold were transferred to the available-for-sale financial assets portfolio and valued at market value.
F-88
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Taking into account that the reclassifícation and subsequent sale of those securities is attributable to the significant increase in the industry regulatory capital requirements, it qualifies as an exception to the tamting rules as established under paragraph AG 22 of IAS 39 ‘Financial Instruments: Recognition and Measurement", On these basis and once the Group has the intention and ability to hold the remaining securities until their maturity, they remained
classified on the held-to-maturity investments portfolio,
The effects of the securities reclassification in the Group consolidated financial statements, at the transfer date, can
be analysed as follows:
From held-to-malurity investments To available-for-sale financial assets Acquisition Fair value Impairment Balance Acquisition Fair value Impairment Balance cost reserve (a) cost reserve 584 923 (6 138) { 50) 578 735 584 923 (13 590) ( 50) 571 283
(a) Remaining value of the fair value reserves at the transfer date for the held-to-maturity investments portfolio occurred with reference to 1 June 2008.
During the second quarter of 2011, taking in consideration the new solvency rules applicable to the insurance industry in Portugal, in-force from 1 January 2011, the insurance entities of the Group have reclassified from available-for-sale financial assets an amount of euro 150 253 thousand to held-to-maturity investments (see Note 24), in accordance with 1AS 39 Financial Instruments: Recognition and Measurement, as follows:
Reclassification date Amoriisation of sr = T Markei value as Acquisition Fair valve reserve Effective falr value —— Futere at31 December : cost Book value , , A awe Pi Interest 2011 reservé walil Positive Negalive cash-fTows rate © 31.12.2013 (in thousands of earo) Available-for-sale financial assets 172337 150253 . (22 083} 210 961 909% 129 724 12 707 Bonds and other fixed Income securities 172337 150 253 - (22083) 210 964 125 724 12 707 = MA M EE po; — —Ó—À;
a} Undiscounled capital and interest cash flows; future interes is colenlaled based on the forward interest rates al the date of reclassificalion. +) E((eclive interest rate was calculated based on the forward interest rates at ibe date of reclassification; (be malvrily considered was Ihe minimum between the call date, if applicable and ihe matority date of the Financial assel.
It should be noted that this reclassification was made exclusively taking in consideration the solvency rules applicable to the insurance industry and has no impact in terms of ESFG regulatory capital. In accordance with the Bank of Portugal rules, the investments held by ESFG in insurance subsidiaries, are measured for the purposes of the regulatory capital, in accordance with the equity method and are deducted from consolidated own funds as
explained in Note 53.
F-89
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 - (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE28- DERIVATIVES FOR RISK MANAGEMENT PURPOSES
As at 31 December 2013 and 2012, the fair value of the derivatives for risk management purposes can be analysed as follows:
31.12.2013 31.12.2012 Other Oiber Hedging derivatives for Hedging derivatives for derivati risk Total foul risk Total rivatives derivatives management management purposes parposes (in thowsaads of enro) Derivalives for risk management purposes Derivatives for risk management purposes - assets 131641 231 759 263381 153 897 362623 516 520 Derivatives [or risk management purposes - liabilities (68305) (62 405) (130710) (43 581) (81618) (125 159) $3336 169 345 232 681 ILO 316 131005 391321 = a MM M M Accumulated change in the fair value component of assets andliabilities being hedged Financial assets Loans and advances ta customers 43102 ~ 43 102 22391 - 22391 43102 - 43102 22391 - 22391 Financial liabilities Deposits from banks (50109) 1331 (48 778) (67 996) - (67 996) Due to customers { 500) (48 110) (48610) (an (90 099) (30 886) Debl securities issued (19636) (9711) (29347) (38472) 47 631 9159 (70 246) (56 490) (126 736) (107 255) (42 468) (149 723) (27144) (56490) (83634) (84 864) (42 468) (127 332)
As mentioned in the accounting policy described in Note 2.4, derivatives for risk management purposes includes hedging derivatives and derivatives contracted to manage the risk of certain financial assets and financial liabilities designated at fair value through profit or loss (and that were not classified as hedging derivatives).
Hedging derivatives
As at 31 December 2013 and 2012, the fair value hedge relationships present the following features:
31,12.2013. Chamgesiwibe — Acepmgiated falrvalseofihe — changes imfair — Chaages lathe fie Falr value of derivative in the value of the value of ihe hedged Derivative Hedged item Hedged risk Notiogal derivate? year?! hedgeditem?! liem |a the year” (In thouiands of eura)
Interest Rate Swapf Currency Loans aud advances to customers Interest rate 608 738 (11213) (21366) 343102 20327 Interest Rate Swap Deposits from banks Interest rate 174 006 M 131 {19161} (50109) 17887 Interest Rate Swap Due to customers Interest rate 4417 21% (286) C500 286 Equit5/Inlerest Rate Swap Debt security issued Inlerest rale/Quotation 1824 724 481K (26 763} (19636) 20345 2611379 61316 (57 576) (27148) 5934$ — —— —ÓÓÓÓ —Ó—
2 AticitataHe to rhe hedged risk Di faelafcs acermed ineas
F-90
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
31.12.2012 Chamgesimihe — Accemilafed
fairvalue of tbe chaageslofalr Changes In ike fair
Fair vale of derivative ia the value of he valne of the hedged
Derivate Hedged item Hedged risk National derivative 9 year “| tedgeditem gy liem la the year”?
Qa honran ds of euro)
Interest Rate Swap! Currency Loans and advances lo customers Interest rate 529 897 (23884) (V9) 22391 ( 638) Interest Rate Swap Deposits from banks Tnieresi rale 173 006 61725 13719 (67 996) (17H) Interest Rate Swap Due to customers Interest rale 440 2174 {50 ( 787) 41 Equily/Interest Rate Swap Debt secanily issued Interest rale/Quolation 1656777 61301 4919 (38472) (3685) 2365091 110316 18 479 (894861) (16016)
ES, — 9S A LnDburable to lhe hadged rick QI Toolafes scerpad interest
Changes in the fair value of the hedged items mentioned above and of the respective hedging derivatives are recognised in the income statement under net gains / (losses) from financial assets and financial liabilities at fair value through profit or loss.
As at 31 December 2013, the ineffectiveness of the fair value hedge operations amounted to a loss of euro 8.2 million (31 December 2012: euro 2.5 million gain) and was recognised in the income statement. ESFG Group evaluates on an ongoing basis the effectiveness of the hedges.
Other derivatives for risk management purposes Other derivatives for risk management purposes includes derivatives held to hedge financial assets and financial liabilities at fair value through profit and loss in accordance with the accounting policies described in Notes 2.5, 2.6
and 2.8 and that the Group did not classify as hedping derivatives.
The book value of financial assets and financial liabilities at fair value through profit and loss can be analysed as follows:
31.12.2013 Derlvative Assets / Liabilities associated Derbative Flosuc[a] assets / Halllties ecogomleal[y hedged Changes [n the Changes In the Carryin Redemption Notlonsl Falr Valne falr vule Fair Value fair value medal amount at derlag the year during the year materlis™? (lu thogsands of euro) Assis Credit Default Swap Loans and advances to customers 268 000 8059 (43385) 268 000 LIglillries Interest Rote Swap Due to customers 5 060 000 77152 (59891) (48 H0) 41221 9346477 9298367 Interes! Rate Swap/FX Forward Debi security issued F095 563 6327) (24 278) 26216 (30102) 316026 386407 Credit Default Swap Debt security issued 441233 12505 LESS? (23412) (3169) 467 953 459006 Equity Swap Debl seconly sued 434476 6263 12073 (7697) (13459) 353257 35889} Equity Option Deb security issued 42010 1793 682 Gay (3765) 1H 379 13019 11363 302 163 345 (103 256) (56 490) (34274) I0 655 092 10 $83 690 A e ED ——
PICorresponds ta the minimum guested amount to be reimbursed al maturity
F-91
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
31.122012 Derivative Assets /Liabllities associated " Financial assets 7 llatiliries o Derivative economitally hedged Changes In the Changes In lhe Carrying Redemption Nolioual Falr Valor Dir valne Falr Valec fair value amosal 21 SEN derlug the year durlbg the year matur! ry O» (lu thonsands of euro) Assets Credit Default Swap Loans and advances to customers 84000 1376 (50072) - - ` 84000 Dahllties Interest Rate Swap Dre to customers 7 540 000 179038 67206 (90099) (nura 8791778 81712693 Interest Rate Swap/FE X Forward Debt securüy issued 1485623 95716 78817 69217 (51029) 303 356 370 714 Credit Default Swap Debt security issued 356315 5810 MTM (22202) £53 860) 376308 358 723 Equity Swap Debt secumy ssned 405 155 (3662) 15811 2585 (24 251) 339252 357231 Equity Option Deh security sued 82525 277 H (2369) (5339) 125874 131824 5941153 281005 156551 (42 468) (247 503) 5936598 10 015206 -e —— — M —— P —— P X
U Correspouss Lo the minimum guareutcd amami 10 be reimbursed al watority
The credit default swaps associated to loans to customers are part of synthetic securitisation operations, as mentioned in Note 50.
As at 31 December 2013, the fair value of the financial liabilities at fair value through profit or loss, includes a positive cumulative effect of euro 93.8 million (31 December 2012: positive cumulative effect of euro 167.1 million) attributable to the Group's own credit risk. The change in fair value attributable to the Group's own oredit risk resulted in the recognition, in 2013, of a loss amounting to euro 73.3 million (31 December 2012: loss of euro 35.2 million).
As at 31 December 2013 and 2012, the analysis of derivatives for risk management purposes by the period to maturity is as follows:
31.12.2013 31.12.2012 Notional Fair value Notional Fair value
(in thousands of euro)
Up to 3 months 1 329 792 17 714 1674 024 13571 3 to 12 months 6 725 633 16 069 2361702 25 889 l to 5 years 4 516 609 89 [80 7205 288 205 686 More than 5 years i 408 147 109 718 1068 230 146 175
13 980 181 232 681 12 309 244 391 321
E ESS OSS M
F-92
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ESPIRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE30- PROPERTY AND EQUIPMENT
As at 31 December 2013 and 2012 this balance is analysed as follows:
31.12.2013 31.12.2012 {in thousands of euro) Property Land and buildings 536 205 512 493 Improvements in leasehold property 238 999 228 930 Other 374 [139 775 578 742 562 Equipment Computer equipment 342 117 348 663 Furniture 143 876 139 792 Fixtures 143 279 146 077 Security equipment 44 893 42 469 Office equipment 40 545 39 917 Motor vehicles 17 400 14 693 Other 10 595 I3 675 742 705 745 286 Other 6 615 13 029 1 524 898 1500 877 Work in progress Land and buildings 389 342 401 044 Improvement in leasehold property 416 344 Equipment 2 823 2 170 Other 67 56 392 648 403 614 Accumulated depreciation (942 928) (921 485} Impairment losses ( 389) ( 389) (943 317) (921 874)
974 229 982 617
In accordance with the accounting policy described in Note 2.14, the Group concluded that there was an indication of impairment in relation to certain property and equipment. Therefore it has performed impairment tests for these assets and has recognised an accumulated impairment loss of euro 389 thousand (31 December 2012: euro 389 thousand).
F-96
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movement in this balance was as follows:
Acquisilion costs Balance as at 31 December 2011 Change in the scope of consolidation (b) Acquisitions Disposals Transfers (a) Exchange differences and olher (c)
Balance as at 31 December 2012 Acquisitions Disposals
Transfers (a) Exchange differences and other
Balance as at31 December 2013
Depreciation Balance as at 31 December 2011 Change in the scope of consolidation (b) Depreciation Disposals Transfers (a) Exchange differences and other (c)
Balance as at31 December 2012
Deprecialion
Disposals
Transfers (a)
Exchange differences and other
Balance as at 31 December 2013 Impairment
Balance as at 31 December 2011 Impaiment losses
Balance as at 31 December 2012
Balance as at31 December 2013 Net balance as at 31 December 2013 Net balance as at 31 December 2012
Property
1 007 039 (279 558) 5615
(20 688) 22 859
742 562
5 108 (6412) 38 123
347 428 € 59 832) 30 749 (19 087) (1110)
297 627
22 474 (6396) 4012
458 389
Equipment
847 501 ( 130 856) 30 208 (13 607)
745 286
29 404 (27327) 1353
675 793 ( 104 098) 54 929 (8781) ( 413) 614
618 044
41 463 (26 667) (1 516)
118 619
Work in Other progress Total {in thousands of euro) 25262 333 835 2214 087 (127731) (3451) (426 602) 511 116 764 153 188 ( 61) ( 850) (35 206) - (34 592) (6 724) 54 (8092) 5 748 13 029 403 614 1 904 491 433 86 427 121372 - ( 81) (33 820) (6665) (41 438) (8627) ( 182) (55 874) (65 870) 6 615 392 648 1917 546 14 014 - 1 037 235 (11075) - (175 005) 2 864 - 88542 ( 45) - (27913) - - (1523) 56 - 149 5814 - 921 485 878 - 64 815 - - (33063) C4511) - (2015) ( 139) - (8294) 2042 - 942 928 917 - 1306 ( 917) - ( 917) - - 389 - - 389 4 573 392 648 974229 7215 403 614 982 657
444 546
127 242
= e M MMMM
(a) Relating to discontinued branches, transferred 10 the balance Non-current assets held forsale (b) Relating to the change in the consolidation method of ES Saúde, from full consolidation to lhe equity method, as wellas the sale of Pastor Vida and the acquisitton of Tranquilidade Angola
(c) Relating to the acquisition of BES Vida
F-97
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The balance Equipment — Motor vehicles includes equipment acquired under finance lease agreements, whose payment schedule is as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Gross investment in finance leases, payable
Up to 1 year 69 106 From 1 to 5 years 73 138 142 244 Interest Up to 1 year 4 10 From 1 to 5 years 4 5 8 15 Principal Up to I year 65 96 From 1 to 5 years 69 133 134 229 NOTE 31 - INVESTMENT PROPERTIES
Investment properties are analysed as follows: 31.12.2013 31.12.2012
(in thousands of euro)
Insurance activity 621 000 676 853 Real estate activity 98 422 120 470
719 422 797 323
F-98
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movement in investment properties for the years ended 31 December 2013 and 2012 can be analysed as follows:
Insurance Real estate activity activity Total
(in thousands of euro)
Net balance as at 31 December 2011 315 393 2 645 318 038 Change in the scope of consolidation (a) 391 418 122 759 514 177 Acquisitions 62 2754 2816 Improvements 946 - 946 Disposals ( 12 503) - ( 12 503) Other (2 899) (4 896) (7795) Unrealised gains / (losses) (15 564) ( 147) (15 711)
Net balance as at 31 December 2012 676 853 120 470 797 323 Change in the scope of consolidation (b) - (21 574) (21574) Acquisitions 350 628 978 Improvements 4932 - 4932 Disposals (21 646) - ( 21 646) Other (46 556) 20 ( 46 536) Unrealised gains / (losses) 7 067 (1122) 5945
Net balance as at 31 December 2013 621 000 98 422 719 422
(a) relating to the consolidation of BES Vida, Fungere, Fungepi, Fundo de Investimento Imobiliário Fechado Corpus Christi, Imocrescente and Imoprime
(b) relating to the deconsolidation of Imocrescente
The carrying amount of investment property is the fair value of the property as determined by a registered independent appraiser having an appropriate recognised professional qualification and recent experience in the location and category of the property being valued. Fair values were determined having regard to recent market transactions for similar properties in the same location as the Group's investment property when available,
Investinent property includes a number of commercial properties that are leased to third parties. Most lease contracts do not have a specified term being possible for the lessee to cancel at any tíme. However, for a small part of commercial properties leased to third parties on average the leases contain an initial non-cancellable period of 10 years, Subsequent renewals are negotiated with the lessee.
The increase in fair value of investment property of euro 6.1 million (31 December 2012: decrease of euro 15.7 million) is recognised in Other operating income and expenses. Rental income from investment property of euro 12.7 million (31 December 2012: euro 13.2 million) is recognised in Other operating income.
The direct operating expenses including repairs and maintenance arising from investinent property that generated rental income during the year reached 4.2 million euro (31 December 2012: euro 5.3 million). The direct operating expenses including repairs and maintenance arising from investment property that did not generate rental income during the year reached euro 0.2 million (31 December 2012: euro 0.7 million).
F-99
ESPÎRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 32 - INTANGIBLE ASSETS
As at 31 December 2013 and 2012 this balance is analysed as follows: 31.12.2013
31.12.2012
(in thousands of euro)
Goodwill 454 089
Value in force -
Internally developed Software 130 691 Acquired from third parties Software 712 049 Other 5484 717 533 Work in progress 37 835 1340 148 Accumulated amortisation (721815) Impairment ( 10 064) 608 269
F-100
441 504
107 768
107 437
680 960 1 870
682 830 40 028
1379 567 ( 666 578) (9779)
703 210
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Goodwill, recognised in accordance with the accounting policy described in Note 2.2, is analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro) BES Vida 234 574 234 574 PARTRAN 61 123 61 123 BES 58 336 58 336 BESPAR 5 960 5 960 MARIGNAN GESTION 3 613 3613 BEST 2 349 2349 CONCORDIA 1 722 1756 ES Investment Holding (a) 47 540 48 567 ES Gestion 2 459 2 459 AMAN BANK 16 046 16 046 Imbassaí 13 526 - Other 6 841 6721 454 089 441 504 Impairment (10 064) (9 779)
444 025 431 725
(a) Holding company of Execution/Noble
In May 2012, BES acquired from Credit Agricole the remaining 50% of share capital of BES Vida becoming to hold the entire share capital and the management control over its activities, Goodwill and Value in Force of BES Vida, in the amount of euro 234.6 million and euro 107.8 million, respectively, were calculated at the date of acquisition on a provisional basis, in accordance with paragraph 45 of TFRS 3.
Considering the reinsurance contract signed during 2013 and described in Note 11, which reinsures 10096 of the life insurance portfolio, including all the policies in force in BES Vida as at 30 June 2013, transferring to the reinsurer all risks and rewards associated to these contracts, the respective value in force in the amount of euro 137.5 was derecognised. The value in force of the remaining contracts, in the net amount of euro 25.4 million at the date of the reinsurance contract, have a liability nature and, as such, were accounted in Other liabilities, As at 31 December 2013 the amount was amortised in euro 3.5 million amounting as at date to euro 21.9 million (see Note 44).
BES Vida
The value of BES Vida was determined considering the Embedded Value and the Goodwitl. The Embedded Value consists in adding (i) the company's equity (adjusted of unrealised gains and losses, net of tax) and (ii) and the expected present value of flow of distributable future profits from the policies in force at valuation date (adjusted by the cost of the solvency margin, the time value of options and guarantees and by the cost of residual risks that are not coverable). Goodwill consists in the value of new business to be developed by the company in the future.
For valuation putposes, it was used the business projections for the next 30 years and was applied a discount rate of 9.596, which included an appropriate risk premium for the estimated cash-flows. Based in these assumptions the recoverable amount of the investment exceeds the book value, including Goodwill.
F-101
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The projections for a 20 year period are based in the long term nature of the insurance business, where either risk and financial investment contracts have long term maturities. Partran
Partran is the holding company for Tranquilidade Sub-Group. The recoverable amount of Partran was determined based on (1) the value of Tranquilidade business stand-alone and (ii) the value of each of its subsidiaries.
The valuations performed used a Dividend Discounted Methodology and were back tested based on market multiples considering a control premium.
Based on the above assumptions, the recoverable amount exceeded the carrying amount including goodwill.
BES
The recoverable amount of BES was determined based on appropriate market multiples taking in consideration (i) historical earnings estimates for the sector, discounted using an adequate discount rate which includes a risk premium appropriated for the estimated future cash-flows and (ii) adequate control premiums.
Based on the above analysis, the recoverable amount of the investment in BES exceeded the respective carrying amount including goodwill.
ES Investment Holding Limited
The recoverable amount of ES Investment Holding Limited has been determined using cash flow/dividends predictions based on (i) the financial budget approved by management covering a nine-year period, (ii) a terminal growth rate of 3%, in line with the estimated nominal growth for the country where the company is located and (iii) a discount rate of 9.096 including a risk premium appropriated to the estimated future cash-flows.
The nine-year period for estimating the future cash-flows reflect the fact that the company was acquired in late 2010 and its business strategy is being redefined. It is expected that the company achieves a maturity stage only at the end
of that time period.
Based on the above assumptions, the recoverable amount exceeded the carrying amount including goodwill.
Aman Bank
On 31 December 2011, the Group recognised an impairment of euro 8 023 thousand in goodwill related with the acquisition of Aman Bank. The impairment reflects the changes of the estimated future cash flows expected by the Group in this entity as a result of the political situation lived in Libya during 2011.
In 2012 and 2013, this entity showed a positive trend, thus there was no need to reinforce the impairment loss
recognised.
The balance of internally developed software includes the costs incurred by the Group in the development and implementation of software applications that will generate economic benefits in the future (see Note 2.15).
F-102
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounis expressed in thousands of euro, except when indicated)
The movement in this balance was as follows:
Goodwill and
Value in Work in Force Software Other progress Total
(in thousands of euro) Acquisition costs
Balance as at31 December 2011 404 067 742 370 1236 32 798 1180471 Acquisilions: Internally developed - 373 - 8257 8 630 Acquired from third parties (A) 346 696 12 999 4 30 326 390 025 Disposals (182383) (2998) (81) ( 103) (185 565) Transfers - 32 440 H (32454) ( 14) Exchange differences aud other (b) (e) ( 19 108) 9 594 35 1204 (8275) Balance as at31 December 2012 549272 788 397 1870 40028 1379 567 Acquisitions: Intemally developed - 252 - 9 147 9399 Acquired from third parties 13 526 14 393 3 650 29 189 60 758 Disposals (d) (137 476) ( 460) (5) - (137 941) Transfers (d) 21989 39 741 - (39 741) 21 989 Exchange differences and other 6778 417 (31) ( 788) 6376 Balance as at 31 December 2013 454 089 842 740 5 484 37 835 1340 148 Amorlisation Balance as at 31 December 2011 5 756 614777 1114 - 621 647 Change in the scope of consolidation - (6312) € 10 098) - (16419) Amortisation 4322 52 616 299 - 57237 Disposals (10078) (2875) ( 81) - (13034) Exchange differences and other (e) (2 169) 9 180 49 H 7 060 Balance as at31 December 2012 (2169) 667 386 (8717) - 656 500 Amorlisalion - 54 317 326 - 54 643 Disposals - ( 461} (5) - ( 466) Exchange differences and other 2169 (1042) 10 011 - 11 138 Balance as at31 December 2013 - 720 200 1615 - 721 815 Impairment Balance as at 31 December 2011 9 628 - - - 9 628 Exchange differences and other 151 - - - 151 Balance as at31 December 2012 9779 - - - 9779 Impairment losses 362 - - - 362 Exchange différences and other ( 77) - - H ( 77) Balance as at31 December 2013 10 064 - - - 10 064 Net balance as at 31 December 2013 444 025 122 540 3869 37 835 608 269 ee eee Net balance as at 31 December 2012 541 662 121 011 10 587 40028 713 288
ED" G —
(a) relating to the acquisition of BES Vida and Tranquilidade Angola
(b) includes euro 19 683 thousand relating to the de-recognilion of goodwill on Gespastor (c) includes euro 8 917 thousand relating to the acquisition of BES Vida
(d) BES VIF - Other liabilities
(e) includes euro 8 791 thousand relating to the acquisition of BES Vida
F-103
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 33 - INVESTMENTS IN ASSOCIATES
The financial information concerning associates is presented in the following table:
Assets Liabilities Equity Income ProflutLoss) of the year 3112.2813 3ín.281 31n.20D 3112.2812 311.1013 EISCHT 210. 3910 34.12.2812 311.181 31.12.2012 qin thonsands af enra)
BES SEGUROS 116 330 120 243 84941 89 019 31389 31 204 73935 66 537 7142 697 EURO? ASSISTANCE 49 186 50 053 33 362 35 048 13323 15005 43439 55 496 4 040 2797 ESSAUDE 37747 492 447 334 535 364 015 143212 128432 374 285 344801 14023 (2611) LOCARENT 244535 283 740 231 418 271404 I3117 924336 84 420 94213 2401 2355 ESEGUR 36 790 39 121 H 495 28 526 12295 10595 51252 50980 998 595 FUNDO ESIBERIA 15 286 13394 104 169 I5182 13 725 422 466 ( 143) ( 106) BRB INTERNACIONAL - 12 833 H 12 407 - 476 - 1243 - ( 599) AUIOPISTA PEROTE-XALAPA - 650 179 - 521167 - 129012 - - H { 6634) ASCENDI GROUP 4314000 4056000 3 750000 3 636 000 564 000 400000 158 000 140 060 21000 78000 EMPARK 768 532 782 872 613 093 651 071 123 439 131793 163 833 166 594 € 3008) (7171) AUVISA - AUTOVIA DE LOS VINEDOS 208 484 216 000 HSH 222 000 (53101) ( 6000) 14 84 14 000 (2540) (4000) UNICRE 315 889 305 005 185 723 172 9341 t30 166 125 06€ 127 189 231070 9785 11256 MOZA BANCO 36) 146 186 719 327 396 154 633 33 130 32036 46 091 21760 924 (3289) RODI SINKS& IDEAS 43 084 43 446 19 138 20537 23946 22509 17 26$ 19 528 EIH 1609 Acquisition cost Voting interest Book value Share of profil of associates
3112-2013 31.12.2012 3L12.2013 JLH.2012 3112200 3L0.202 31.12.2013 318208 (in thousands of euro)
BES SEGUROS 7501 7501 50.00% 50.00% 15 695 15 602 3571 3 486
EUROP ASSISTANCE 2344 2344 47.00% 47.00% $ 792 5642 1899 1314
ES SAUDE 143 747 143 747 42.89% 42.89% 120 580 114 252 6234 ( 604)
LOCARENT 2967 2967 50.00% 50.0096 6 869 4478 1201 1298
ESEGUR 9 634 9 634 44.00% 44.00% 12 254 11506 439 262
FUNDO ES IBERIA 8 08I 7087 38.6794 18.67% 7312 5 649 658 261
BRD INTERNACIONAL - 10659 - 25.00% - 119 101 ( 216)
AUTOPISTA PEROTE-XALAPA . 36618 H 20.00% . 30 302 3647
ASCENDI GROUP 179 772 179 772 40.00% 40.00% 150 338 186 955 ( 8D 6 566
EMP ARK 52 429 52 429 22.20% 22.20% 47331 50 090 ( 2014) (2193)
AUVISA - AUTOVIA DE LOS VINEDOS 41 056 41 056 50.0075 50.00% 34 792 34 792 - (251)
UNICRE 11497 11 497 17.50% 17.50% 22 779 21886 1712 1970
MOZA BANCG 37 707 12 791 25.10% 25.10% 37 603 12 234 663 ( 826)
RODI SINKS & IDEAS 1240 1240 24.81% 24.81% 8187 8 129 257 194
Olhers 160 044 151 033 136 69t 138 478 (5471) ( 10633)
658 019 670 435 606 473 640 614 8825 4756 = = a — ; —————— ——
F-104
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movement occurred in this balance is presented as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Balance at the beginning of the year 640 614 578 327 Change in the scope of consolidation 10 017 47 047 Disposals (79 839) (60 026) Acquisitions and capital increases (See Notel) 35377 32 966 Share of profit of associates 8 823 4756 Fair value reserve from investments in associates 979 44 770 Dividends received (6253) (3305) Exchange différences and other (3245) (3921)
Balance at the end of the year 606 473 640 614
The changes in consolidation scope in 2013, arise from the full consolidation of the Fund Imoprime. The changes in consolidation scope in 2012, arise from (1) the full consolidation of BES Vida from | May 2012, which in 2011 was included in ESFG consolidated financial statements following the equity method; and (ii) the loss
of control over ES Saüde in 2012, this entity being currently included in these consolidated financial statements following the equity method.
NOTE34- TECHNICAL RESERVES
The direct insurance and reinsurance ceded technical reserves are analysed as follows:
31.12,2013 31.12.2012 Direct Reinsurance Direct Reinsuranco insurance ceded Total insurance ceded Total
(in thousands of euro)
Uneamed premiunis reserve 111940 (19739) 92201 1H 019 (19651) 94368 Life mathematicalreserve 1999962 (7 510) 1992 452 1831575 ( 634) 1831041 Claims outstanding reserve 499 490 (48 738) 450 752 517407 (47 692) 469715 Unexpired risks reserve 22040 - 22040 19476 . 19476 Reserve for bonus and rebates 9724 ( 912) 8812 5751 (2 796) 2955
2643156 (76 399) 2566257 2 488 328 (70 773) 2417555
F-105
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The life mathematical reserve is analysed as follows:
31.12.2013 31.12.2012 Direct Reinsurance Direct Reinsurance insurance ceded Total insurance ceded Total
(in thousands of euro)
Annuilies 113102 (7509) 105 593 114 286 ( 634) 113 652 Saving Contracts wih Profit Shanng 1886 860 en 1886 859 1717 389 - 1717 389 1999 962 (7 510) 1992452 1831 675 ( 634) 1831 041
In accordance with IFRS 4, the contracts issued by the Group for which there is only a transfer of financial risk, with no discretionary profit sharing, are classified as investment contracts and accounted for as financial liabilities.
The claims outstanding reserve by line of business is analysed as follows:
31,12,2013 31.12.2012 Direct Reinsurance Direct Reinsurance insurance ceded Total insurance cdd Total
(in thousands of curo)
Life 48 163 (3657) 44 506 35225 (1873) 33352 Workers compensation (malheratical reserve) 136293 € 525) 135 768 128 630 (1002) 127 628 Workers compensation (not related to life pensions) 65559 (3245) 62314 59740 (1374) 58366 Accidents and health 10 126 ( 188) 993 10273 { 243) 10030 Fire and other hazards 35172 (16287) 18835 43324 (18742) 24 579 Motor 174997 (16150) 153847 210614 (14206) 196 408 Maritime, airline and transportation 6737 (3101) 3636 6603 {2815 3788 "Third parties liabitilies 19408 (2945) 16463 21305 (6133) 15172 Credit and sureiyship 4 (12 30 80 (40) 40 Other 2993 (2628) 365 1616 (1264) 352
499 490 (48 738) 450752 517 407 (47 692) 469 715
— — n— I — —À e;
The claims outstanding reserve represents unsettled claims occurred before the balance sheet date and includes an estimated provision in the amount of euro 22 850 thousand (31 December 2012: euro 22 106 thousand), for claims incutred before 31 December 2013, but not reported (JBNR).
Included in the amount of claims outstanding for workers’ compensation is euro 136 293 thousand (31 December 2012: euro 120 885 thousand), relating to the mathematical reserve for workers' compensation.
The mathematical reserve for workers’ compensation includes an amount of euro 0 (31 December 2012: euro 0 thousand) as a result of the liability adequacy test (see Note 53).
Additionally, mathematical reserve for workers" compensation also includes an accrual related to the present value of the future contributions to Workers Compensation Fund (FAT) for an amount of euro 8 832 thousand (31 December 2012: euro 7 668 thousand).
The claims outstanding reserve also includes an estimation of future costs related to the settlement of pending claims
(expense reserve), both-declared and non-declared, for an amount of euro 26 473 thousand (31 December 2012: euro 22 168 thousand).
F-106
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movements on the claims outstanding reserve of direct insurance business are analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Balance at the beginning of the year 517 407 499 462 Change in the scope of consolidation - 26 328 Plus incurred claims Current period 569 278 695 230 Prior periods (47 669) (40 062) Less paid claims related to Current period ( 422 706) ( 548 278) Prior periods ( 116 820) (115 273)
Balance at the end of fhe year 499 490 517 407
The reserve for bonus and rebates corresponds to the amounts attributed to policyholders or beneficiaries of insurance and investment contracts with profit sharing, in the form of profit participation, which have not yet been specifically allocated and included in the life mathematical reserve.
The movement in the reserve for bonus and rebates for the years ended 31 December 2013 and 2012 is as follows:
31.12.2013 31.12.2012
(in thousands of curo)
Balance at the beginning of tlie period 5751 5933 Change in the scope of consolidation - (1326) Amounts paid (2 609) (2 099) Estimated attributable amounts 6582 3243
Balance at fhe end of the period 9 724 5 751
As at 31 December 2013, life mathematical reserve includes an amount of euro 0 (31 December 2012: euro O thousand) as a result of the liability adequacy test. This test was performed based on the best estimate assumptions (see Note 53).
F-107
ESPÍRITO SANTO FINANCIAL GROUP S.A,
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amounts expressed in thousands of euro, excep! when indicated)
NOTE 35- OTHER ASSETS
As at 31 December 2013 and 2012, the balance other assets is analysed as follows:
Collateral deposits placed Derivatives Collateral CLEARNET, VISA and EBA Collateral related to Letters of Credit Collaleral Deposits for litigations Collaleral Desposits in relation with reinsurance operations -Other Recoverable government subsidies on mortgage loans Public sector Debtors from the banking business Debtors from the insurance business Debtors from medical serviees business Sundry debtors
Impairment losses on debtors
Debtors arising out of direct insurance operations Debtors arising out of reinsurance operations
Impairment losses on debtors arising out of direct insurance and of reinsurance operations
Acerued income
Prepay ments and deferred costs
Gold, other precious metals, numismaties and other liquid assets Other assets
Deferred acquisition costs
Other sundry assets Stock exchange transactions pending settlement Other transactions peading settlement
Assets recognised on penstons (see Note 14)
F-108
31.12.2013
31.12.2012
{in thousands of euro}
1 483 337 927 066 30 701 44 797 54 956 334 677 91 140 30 426 191 978 680 299 23 945 580
11 488
2 422 053 ( 156 976)
2265077
63 996 8558
72554
(7336)
65 218
66 852 121 453 19247 233 448
243 695
21 201
256 333 57774
314 107
10
3 097 613
1 664 467 1438955 33 597 26 694 53 000 112 221 38 658 152 428 631 951 24 101 432
21 155
2533212 (236 196)
2297016
67 170 10 814
77 984
(7228)
70 756
54 497 119 749 11127 264 282
275 409
21954
154 257 222202
376 459
18 815
3234 655
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The caption collateral deposits placed includes deposits made by the Group as collateral in order to be able to perform certain derivative contracts in organized markets (margin accounts) and in over the counter markets (Credit Support Annex — CSA). This caption also includes a collateral deposit made following the reinsurance agreement between BES Vida and New Re, in favour of the reinsurer to protect the reinsurer against the credit risk of BES Vida under the reinsurauce agreement.
Loans to companies in which the Group has a non-controlling interest include:
— euro 100 million related with loans to Locarent — Companhia Portuguesa de Aluguer de Viaturas, S.A. (31 December 2012: euro 100 million);
— euro 78.7 million of loans to entities within the Group's venture capital business, of which euro 49.5 million are provided for (31 December 2012: euro 67.2 million, of which euro 30.7 million were provided for); and
— 872 million of loans and junior securities following the transfer of loans/assets to companies and specialized funds, of which euro 83.4 million are provided for (31 December 2012: euro 94.3 million, of which euro 87.7 million were provided for).
As at 31 December 2013, the balance prepayments and deferred costs includes the amount of euro 76 745 thousand (31 December 2012: euro 64 901 thousand) related to the difference between the nominal amount of loans granted to Group's employees under the collective labour agreement for the banking sector (ACT) and their respective fair value at grant date, calculated in accordance with IAS 39. This amount is charged to the income statement over the lower period between the remaining maturity of the loan granted, and the estimated remaining service life of the employee.
The stock exchange transactions pending settlement refer to transactions with securities on behalf of third parties, recorded on trade date and pending settlement, in accordance with the accounting policy described in Note 2.6.
Deferred acquisition costs relate to the insurance business and can be analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Non-life insurance business 21201 21 954
21 201 21 954
The movements on the deferred acquisition costs for the non-life business are analysed as follows:
31.12.2013 31.12.2012 (in thousands of euro) Balance at the beginuing of the year 21 954 22 517 Acquisition costs ofthe year 21 201 21 954 Acquisition costs amortisation ( 21 946) (22 517) Others (8) - Balance at tlie end of the year 21 201 21 954
F-109
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The balance of impairment losses is presented as follows:
Debtors
Debtors arising out of direct insurance and reinsurance operations
31.12.2013 31.12.2012
(in thousands of euro)
156 976 236 196 7 336 7228 164 312 243 424
As at 31 December 2012, the impairment losses on debtors caption included also an amount of euro 86.6 million
related to the impairment of international assets in the carbon market.
The movements occurred in impairment losses are presented as follows:
Balance as at 1 January Change in the scope of consolidation Charge ofthe year Write back of the year Charge off Transfers Other
Balance as at31 December
NOTE36- DEPOSITS FROM CENTRAL BANKS
The balance deposits from central banks in analysed as follows:
From the European System of Central Banks
Deposits Other funds
From other Central Banks Deposits
F-110
31.12.2013 31.12.2012
(in thousands of euro)
243 424 67 597 ( 101) (12726) 32 690 196 374 (3627) (13482) (95 289) (1 104) 4335 - (17 120) 6 765 164312 243 424 31.122013 31.12.2012
(in thousands of euro)
202 469 129 382 9 150 000 10 150 000 9 352 469 10 279 382
419 775 661 943
419 775 661 943
9 772 244 10 941 325
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 341 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, Other funds from the European System of Central Banks includes euro 9 157 million and euro 10 156 million, respectively, covered by securities pledged as collaterals in the amount of euro 18.8
biflion and euro 19.6 billion, respectively (see Note 47).
As at 31 December 2013, the balance Deposits from other Central Banks — Deposits includes the amount of euro 3 million related to deposits with Angola Central Bank (31 December 2012: euro 431 million).
As at 31 December 2013 and 2012, the analysis of deposits from Central Banks by the period to maturity is
presented as follows:
Up to 3 months ito 5 years
NOTE37- DEPOSITS FROM BANKS
The balance deposits from banks is analysed as follows:
Domestie Loans Deposits Very short terms funds Repurchase agreements Other funds
International Deposits Loans Very short terms funds Repurchase agreements Other funds
— 31122013 —
31.12.2012
(in thousands of euro}
642 604 9 129 640
9 772 244
31.12.2013
852 635 10 088 690
10 941 325
ED
31.12.2012
(in thousands of euro)
1927 336 062 82111
2 078
422 178
716 344 2775 812 91 049 817 624 210 487
4 611 316
5 033 494
36
378 864 40 172 66 579 4 486
490 137
378 345 2 433 985 194 475 1311 087 257 951
4 575 843
5 065 980
As at 31 December 2013, the balance deposits from banks includes the amount of euro 224 109 thousand (31 December 2012: 612 277 thousand) related to deposits recognised on the balance sheet at fair value through profit or
loss.
F-111
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012 the analysis of deposits from banks by the period to maturity is presented as
follows:
31.12.2013
31.12.2012
(in thousands of euro)
Up to 3 months 2 721 882 2 318 791 3to 12 months 886 607 1335 967 l to 5 years 869 486 683 935 More than 5 years 555 519 727 287 5 033 494 5065980 NOTE38- DUE TO CUSTOMERS The balance due to customers is analysed as follows:
Repayable on demand
Demand deposits 11379 879 11 100 769 Time deposits Time deposits 23 822 634 22213 567 Notice deposits 18 000 3 144 Other 21 175 77327 23 861 809 22 294 038 Savings accounts Pensioners 295 146 28 022 Emigranis 18 041 3521 Other 2 093 436 1645 970 2 406 623 1677 513 Other funds Repurchase agreement 275 003 204 847 Other 170 493 348 307 445 496 553 154 38 093 807 35 625 474
31.12.2013
31.12.2012
(in thousands of euro)
This balance includes the amount of euro 9 446 million (31 December 2012: euro 8 797 million) of deposits recognised in the balance sheet at fair value through profit or loss.
F-112
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The analysis of the amounts due to customers by the period to maturity is as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Repayable on demand 11 379 879 11 100 769 With agreed maturity: Up to 3 months 13 798 298 11 503 648 3 to 12 months 9 351 420 6 516 402 I to 5 years 3 358 727 6 133 519 More than 5 years 205 483 371 136
38 093 807 35 625 474
NOTE39- DEBT SECURITIES ISSUED
The balance of debt securities issued is analysed as follows: 31.12.2013 31.12.2012
(in thousands of curo)
Debt securities
Euro Medium Term Notes 8 745 475 10 087 137 Certificates of deposit 342 539 620 235 Covered bonds 901 122 864 100 Debt bonds issued 1 356 727 ] 409 773 Other ] 269 345 2971 625
12 615 208 15 952 870
As at 31 December 2013, the debt securities issued includes the amount of euro 4 750 million of debt securities issued with a guarantee from the Portuguese Republic (31 December 2012: euro 4 750 million).
As at 31 December 2013, this balance includes euro 3 723 million (31 December 2012: euro 2 660 thousand) of debt securities issued at fair value through profit or Ioss.
On 15 November 2005, ESFG issued the euro 500 000 000 Fixed Rate Step-Up Notes due 2025 with 10 000 warrants. Each of these Notes bearded interest at the rate of 3.5596 until 15 November 2011 and 5.05% from then on. Each warrant entitles the holder to subscribe euro 50 000 to acquire fully paid up shares of ESFG at an initial exercise price of euro 24.50 per share. This exercise price has been adjusted following the terms the contractual conditions to euro 21.24 in 2012. The rights under the warrants are exercisable from and including 26 December 2005 up to the close of business on 8 November 2025.
In the light of IAS 32, the warrants issued correspond to an equity instrument and therefore are recognised in equity and the Notes correspond to a debt instrument and are recognised as a liability.
The value attributable to the warrants upon the initial recognition was calculated by deducting, at inception, the fair value of the Notes from the par value of the instrument as a whole, the fair value attributable to the Notes being calculated as the present value of the contractual future cash flows discounted at a rate of interest, determined at
F-113
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnts expressed in thousands of euro, except when indicated)
inception, based on comparable Notes providing substantially the same cash flows, on the same terms, but without the detachable warrants. On this basis, the Group recognised in equity the amount of euro 118 570 thousand related to the warrants and an amount of euro 381 430 thousand as a liability, corresponding to the respective fair value at the date of issue.
After its initial recognition, the liability accrues interest at an effective interest rate of 6,726, which was the rate used to fair value the liability at the inception.
During 2013, took place an exchange offer of euro 135.6 million of the Notes for euro 122.0 million bonds exchangeable into ordinary shares of Banco Espírito Santo, S.A.. This exchange offer resulted in a decrease in other equity instruments by the amount of euro 32.5 million and in a loss recognised in income statement of euro 7.3 million,
Unless previously redeemed, or repurchased and cancelled, the Notes will be redeemed at their principal amount on 15 November 2025. Following the cancellation of the Notes and Warrants exchanged by ESFG pursuant to the exchange offer (i) the principal amount outstanding is euro 45.8 million in terms of nominal value and euro 38.7 million in terms of book value as at 31 December 2013, and (ii) the number of Warrants outstanding is 915 with a book value of euro 10.5 million.
On 19 December 2011, ESFG issued euro 130 416 000 Convertible Bonds due 2025, as a result of the Exchange Offer of the Euro 500 000 000 Fixed Rate Step-Up Notes described above. Each bond bears interest at the rate of 9.75 and entitles the holder to convert such Bond into new and/or existing fully paid ordinary shares in the capital of ESFG. The initial Conversion Price is Euro 17 per Ordinary share. Unless previously redeemed, or repurchased and cancelled, the Notes will be redeemed at their principal amount on £9 December 2025.
In the light of IAS 32, the conversion option issued corresponds to an equity instrument and therefore is recognised in equity and the Notes correspond to a debt instrument and are recognised as a liability.
The value attributable to the conversion option upon the initial recognition was calculated by deducting, at inception, the fair value of the Notes from the fair value of the instrument as a whole, (he fair value attributable to the Notes being calculated as the present value of the contractual future cash flows discounted at a rate of interest, determined at inception, based on comparable Notes providing substantially the same cash flows, on the same terms, but without the conversion option. On this basis, the Group recognised in equity the amount of euro 17.0 million related to the conversion option.
Under the covered bonds programme, which has a maximum amount of euro 10 000 million, BES Group issued covered bonds for a total amount of euro 4 040 million.
The covered bonds are guaranteed by a cover assets pool, comprised of mortgage credit assets and limited classes of other assets, that the issuer of mortgage covered bonds shall maintain segregated and over which the holders of the relevant covered bonds have a statutory special creditor privilege. These conditions are set up in Decree-Law no. 59/2006, Regulations 5/2006, 6/2006, 7/2006 and 8/2006 of the Bank of Portugal and Instruction 13/2006 of the Bank of Portugal.
F-114
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The main characteristics of these issues are as follows:
Nominal value
Book value (In
Issue date
Maturity dale
Description {In dhonsands of thousands of euro) euro)
BES Covered Bonds 3.375% 1 009 000 859 681 DES Covered Bonds DUE JUL 17 1000 009 - BES Covered Bonds 21/07/2017 1000 000 - BES Covered Bonds DUE 4.675 40000 Alt BES Covered Bonds HIPOT 2018 1 009 000 = 4040000 901 122
As at 3l
17.11.2009 07.07.2010 21.07.2010 15.122010 25.01.2011
17.02 2015 09.07.2017 21.07.2017 26.01.2017 25.01.2018
Interest payment Interest rale Anual 33155 Anual Euribor 6 Monih + 0.60% Anual Eunber 6 Month + 0.60% Anual Fixed raie 4.6% Anual Euribor 6 Month + 0.60%.
euro 5 552.6 million (31 December 2012: euro 5 605.1 million) (see Note 26).
Rating Moody's DBRS Baal AL Baa3 AL Baa3 AL Baa3 AL Baa3 AL
December 2013, the mortgage loans that collateralise these covered bonds amounted to
The changes occurred in debt securities issued during the year ended 31 December 2013 are analysed as follows:
31.12.2012 Euro Medium Term Notes 10 087 137 Certificates of deposit 620 235 Covered bonds 864 100 Debt bonds issued 2 470 593 Other 1910 805
15952 870
6615562
Issues
1433 796 120 7115)
433 862 4627 199
Repayments
Other Netrepurchase a} movements
(in thousands of euro)
(2412267) (396 027)
(1482 201) (5259 297)
(9 849 792)
(3519217) (11274) - (2380)
49927 (12905) (14 861) ( 50 666)
- (9356)
(316 851) (86 581)
"Other movements include accrued interest, fair value adjusiments and foreign exchange differences VP Cerisficates of deposil are presented at Lhe net value, considering their short term maturily
In accordance with the accounting policy described in Note 2.8, debt issued repurchased by the Group is derecognised from the balance sheet and the difference between the carrying amount of the liability and its acquisition cost is recognised in the income statement. Following the repurchases performed in 31 December 2013 and in 31 December 2012, the Group has recognised a gain (already including the gains relating the exchange offer for the Fixed Rate Step-Up Notes described above) of euro 2.2 million and of euro 74.1 million, respectively (see
Note 12).
The analysis of debt securities issued by the period to maturity is as follows:
Up to 3 months
1 to I2 months
l to 5 years
More than 5 years
F-115
31.12.2013
31.12.2013
8 745 475 342 539 901 122
1356 727
1269 345
12 615 208
31.12.2012
(in thousands of euro)
1 403 799 2 604 374 2 684 613 1 538 996 5 144220 7331 056 3382 576 4 478 444 12 615 208 15 952 870
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amounts expressed in thousands of euro, except when indicated)
The main characteristics of debt securities issued are presented as follows:
boer
ECS (London Dranch] BES (| endon Branch) BES Landon Branch) BES {leek E wh) HES ltenion Deech DES d rein Bosch DES (Landes Drach) DES (Londen Dech BES {London Bunch) BES (london Pech) UGS (London Branch) HES (Landon Franch} RES (Lord Franch} DES (Lorden Dach) DES fLéndoa Dreh] BES (London Brinch) BES fens Branch) MES Deanekasg Beach) BES ërargéuad ranch) DES (Laxssrihna d March) DES (Laximnbeurg ranch) DES (Loxemboarg bah BES (Luvambsaro Branch) PES flavembooy Branch} BES Faget
FER Finan
RES Face
DES Feast
DES Fate
BES Foco
BES Finance
CES Frame
BES Frania
EFS Feu
CES Teme
OCS Ina
BES Face
BES Faut
VES France
FES Fast
HES Fair
DCS france
DES Frite
BES Finance
BES Finance
EES Fae
BES Foe
RES From
DCS ras
OCS Tras
BES France
BES Fryn
TCU Far
HER Pence
HEN Grup
DES Gros
DEH Group
BEH Gimp
PES Gp
ER p
BES fiep
RES Fir
-DEH Gon `
ECS Group
BECH Grp
BES Gup
BES taup
HER Group
BEG Cheap
DEM Group
OCS Ging
BFA GR 0.
Da kripton
LES DUE AS 1
BES SERN MH
BES 73755
BES QUE ENS HESE
DES LES AR Y 36
BES PORTUGAL HQ
DES PORTUGAL
GCS OLE FEB. é PES 4 YEA IW
EER 6.74 A GES eR 187014 GES § 8145 MS
DLS 4753 ar
De 6.02% CIE
Bic 805% PAINS Moctgeze Beads
Haten Bod:
Met ce Honda
PIRES EMPRESAS 1 FTA BONO A Cati gis of deporti Cetécrèr of depots Cet pog deposit ENT Sedes E
EMIN Seres 2
HUN Sead
FMTH Ser d
CHIH Sein 5
DND Sedan €
ERTH Sedas T
EU Sefes 9
ERIM Somes 9
ELA Scots 18
EMEN Sedes 11
EMTH Siga 12
ETH Sedes 13
EMTH Sedes 1d
EMTH Seita 56
BES Leccinbaurg 5 HÀ ZER) FES lorode 3% 2 ORFF AES Leto 3 5% HAS DES Luxecixey 15% 21013 OCS Linsey 15% ASP BES Luxembourg 13% 16877047 BES Leemberg 20. EST
ELITA39
ELTH 43
EMin ts
MIZ
EMTS
EMIN53
EMINGO
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Emaar
EXT 33
ERI DE
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FHIN
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ERITH 59
ENTH Ido
ENIH 106
ELM 18}
Fum 153
CTH 153
CTH 146
ERITH 112
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F-116
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--———— | o.
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
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WOnLD ENVESTI ECL 3 D] Eun zt 15 290 5 BES Cus ESP PT QUI CECI DI EUR Alt Mm HH 118 1 PIAH HES op FES ÉS GOUT ARTEA) L aj FUR Ait ins E Fa ola 1 ER 4 ancdeand la oan PEN oup EXP AUTOCALLAALE 7914 aj FIR mit 245 zn d DCH Group ESP TELECOM ITALIA DU DCCTOH a) EUR EI Id au 7.25% + Dën ora ata Curt DES Grup (CSP SPANISH HOTES NOV 2056 a} EUR ait E GU? Di BES Gren EST EOD USD CH DECH DI uen a 1585 2n AAR: EDP CU? HES Gros ESP WOR P EVESEN DEC a HE "mn FAR au a HER Grup ERP IHFHEICA ON LECHO M. a) FLA an AE E TAVS 4 Teira DÄI DCR reg ESP PORTUGUESE REP CLN DEC2021 a) EUR em 8 ami 6% + Republica Posigaath CUI TES Grp COP Vir STIS ECO a OR 2 Tue mie aa} BES Grop ESS UTRITFEIAHCUALS SHS DECIE D Eun 2011 105 als at) FES Ge ESS Evid EGE MS ` 2) DÉI mz E Wi Eri biked FES Coup ESE FEKIS ELO? WAS EQ » rum mr TEN PUR ES] DES Group ESP AUGXIM CADAZ IOCDAS 12-14 a Dë E] 248 xu HI DOS Griep CSP CADADAOLOA VS CUR CCOT15 PL a) ER zi T at ad BEN Coop ESM ENPRES CHAESAS FEBTOI? EOL, y Em GA) um 291 "ul VES Gr ESA? EDUC LUR?913 GIS ") EUR EA usa 70014 69% + EU ON BES (gp Fetz mai GA Sp PO LOUER. a) Em 2617 sa BE ERA nied DES: Orap ESP LUXURY GOODS LKD LARAS E pu 2012 1282 201 a DES Garp ESP pa UND AREAS 3) EUR a2 1590 25 PSE Linked BES Group EST QUAL Leon MARZ LE DI EU mir Aan 25H x} BER Grp ESP GO ÇITI EURIBOR A ATES D EUR mur 1591 KO Cota ENTE 24 FES Group ERP APS TA RÉCENT BARKE] LAKEI al EA mz ta KA ah) DES Give CES CLIE REP PORTUGULSA OCTA H a Eua 7012 uo au Resvtica Frinn CLH DER Ore ESP ARRAS Pod LINKED a) EUR ze 19 £t PS Linked BES Grup ESN ARAH BES PROTECCAT LKD D EUR 7002 ub MI triatlo Gris bestoen ES PT P HERI LXO JUH IS D] EUR mlz LI EI PIS Il On LER ing ESP VI TYR CRETEI LEQ JUN x) ELR 70? 11218 TUIS APS + PL CIN CCS iach CSP NES TECHO OG ROT COL aj DR 3 sra ans ay ECS Group ESP LXPOSICÁD PLTRÁLCO ABS is à) DR = 165 ae Great Linked BES Group ESP BES EXPOS PETROLE ANIS EOL D EUR a zm m$ Bem Les BES GP ESI RECOY Bok? 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F-117
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
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F-118
BEEN
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 - (Continued)
(Amounts expressed in thousands of euro, except when indicated)
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aj bakkes, al Mi wtue through Det and cs 03 ech erbei) canons
By kdexkd ts prrdous Cuppa + dprasd - Eurber
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died r8 a balki eocspot ed by Dou foes Ceztax 40, SAP 500 Jad Maka 245
clients le a brhri composed by EVA aed BÉCH
T axo crédit ak
gj bdexed la a burg composed Ey Fragen Telecora and Daach Tetskom
bi befarad Le a aiio cotés éd Ey Pareobrak, Cam pba Sédaruttfa Hate d. erras art Eca Frida ico Vj need io a baste composed by Ere son, Kema ya, Sanimoder, Seno Aventis and ABS LTD.
D ninaed to crea (Fac ta dcaub ] of Seat sender, PT PIE FZL FOR and flee
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ve) indexed tor bark compared by Eurestazdà, SPO), Hi21d3416 and EZ
ry badere [2 2 borke comen by TOPI, AANA SEIRI, KACE PLATY, KI acd SES Sireaçex
ej kidexed ha d brio composta by HOOD, MSC ind MCI Tasas Ind SP AGRAQ
Bee ja a bythel coe puried by Peireta rs. Ponpak Sitervegre Nam, Vols SA. zu Uckranca am! Banco rgdiesto abeng biskH composto by MSC Dady TR Het Emering Lista Egypt USD ard MSCS Africa TOP42 1] 5% ridend to a barka composed by MCI Osily TR Hel Ereeiäag Habei a Egyp USO and FTSEZISE Ales TOP ay ndaxed Ip. 4 hashed competed by (dant ecleecan, Falgeoa corp. Maa Inc Tia Pharmacare alind | 14 ad Jungen bé 1] 45 4 dazed Jo Esrcitai Con umet Pee index (CP) (axel Tolo) by Dr Eyropeas
v] Inderal fé a lr rd onerum] by Phipri, Horses, fhordrcia med Vecka
v)ledezed io a basket compared by Gricle, SAP, Cerples Komutsa BHP Ballon, betaat sti
a) indexed lg a hako comprend by Leesbee LIA, Ẹ Gel
x] A Darlays Capital Armour EUR T'A bier
ph bad to 3 backen! coca by Robes, [AML Hard Freie, Bou Urehaora, Cebu ond Eia Farge de Lars Dote à] idées a barkit Compotid by Tateloric A. Dando SY andar, DONA, Aid Dinda Popular
an] laden ed D a babel perogesgd by Letefenw m, Enden, EIE spa ad De tcte Peleo
ab) neto $ Baske CON by Traka A, Santander, DIAM Dank ad Devtecht Teleco
ac] indare |o n bankal composed by Tetança, Akar dut, Tele? and Val)
A) indezad t a bat Ent támdntid by CURA BO, FUSO and TREK emrancy
an) bhed Lo s barby cempor H by Chinn Ug imura g Co, PelocXina Co asd Ching Mode LTO
off nianag là 2 birika] creed bey Are Ammatan, Usi Ferien Facherenl, arche, Pond Read. LVMH acl Hire agde to a basket composed by FEX, Macy's, Madey Deddson, Red Hil vd Suas NE
send io a basta coreponed by Telalonicn, BAD Faria Vodaking Grup DC and E OH
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n) kal Ja a bist of Dosende Capes, GAJ and Dësen
FD) exar do ered of Mortage? Telom, Jelodoreca pre Telecom Baier
Bp) indare 19 senti gd Gas Leg, Kerat aod Tetscom kën
FO FAO vo r bark eegen nd by Paden Bauere Comp intra Vale Tis Dots, tia Uribanca asd ETF Bod Food SA W) daxed to cridit ei Postal Teaco, EOD and Tite am En
ei indexed ba bråd of eech FIO Tee Bata, FU, Portrait Peco
ail] individ la a bird tongaa by Rrpaci, BH. Nestle
- i) edexéd to 1 barta of cedit TD; AEG ES, Tehnica and niiti SPA
sw ianed le a kan comprad by EDD, Potopa Talpcom prd GALP
ma] Weed 18 a br reat ol inked 5028 aad EL
za] band by & keke torpe by bone AR Hra keen Fent, Russa [he porn kéen UST), RAH ASE 200 fred at extend Ia q eed crepe by FAVA, FEM ad Repeal
Ar) iedexad La à Lire GOYA
bai indexed ta LACK Enked
ba) 8.45, 4 Aude inked
Ex] edi] la NY LES]
bf) erar ja a kink compere by Amien, Eterç amid Fedex
ba] holed 18 uer J gnati,
EN ere La shores dL Foil
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ir) FG nde la borrets of Comporta
Ti) kiegad bo er booked composed by Zaart and Tete
G) bitim 1 Commoda ENVIE - WIL Crede Od iced
Ehad e rä ul EOD, PE aod Than
B ledexed ta m bag compor by Duch Telkom AG, Tat a SA and Vedakeea Group PLG
br] fixiracá Lo a bah d competed by Canaan Caf PL eil Carrer
bo) Indexed tá a Rachel téragecutd by | EAC Tenes PLG, Santander DEP, EPA aed LS
be) Educ 16 à BEA corporat by DEA pod APPLE
byydaxid do ce of Tem leën DT, Feet, EDC pad Tay pine
bai ndex ed to Eves asked
bi ide xen bo q Baked Lëzgsc-zi by Jes priora Martha amid Clip
Ba} Indeed] to có (Dour rà daro] f PT, COP and Day
M] indicia Lo a bay ter compontd by Jonbitta A bb, Deeg ard Rocha I loking
F-119
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 40- INVESTMENT CONTRACTS As at 31 December 2013 and 2012, the liabilities arising from investment contracts are analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Fixed rate investment contracts
2754 110 1 407 677 Investment contracts in which the financial risk is borne by the policyholder 1 719 811 2 436 343 4 473 921 3 844 020
Im m———————
In accordance with IFRS 4, the insurance contracts issued by the Group for which there is only a transfer of financial risk, with no discretionary participating features, are classified as investment contracts.
The movement in the liabilities arising out from the investment contracts with fixed rate is analysed as follows;
31.12.2013 31.12.2012
(in thousands of euro) Balance as at 1 January
1407677 63 973 Change in the scope of consolidation (a) - 376 975 Net deposits received 1 480 556 1 071 426 Benefits paid (224 361) ( 156 647) Technical interest charged 90 238 51 950
Balance as at 31 December
2 754 110 1 407 677 (a) Related with the full consolidation of BES Vida from 1 May 2012.
The movement in the liabilities arising out from the investment contracts in which the financial risk is borne by the policyholder is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro) Balance as at 1 January
2 436 343 84 791 Change in the scope of consolidation (a) - 1 868 167 Net deposits received 255 819 521 017 Benefits paid (1 116 456) (178 370) Changes in financial liabilities at fair value through profit or loss 2 890 157227 Technical resuit 141 215 (16 489)
Balance as at 31 December 1719 811 2 436 343 (a) Related with the full consolidation of BES Vida from I May 2012.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 41- PROVISIONS
As at 31 December 2013 and 2012, the balance of provisions presents the following movements:
31.12.2013 31.12.2012
(in thousands of euro)
Balance as at 1 January 255 601 212 796 Change in the scope of consolidation - 12 987 Charge of the ycar/ write back 695 651 57251 Charge off (16 071) ( 17 965) Exchange differences and other (18 161) ( 9 468)
Balance as at 31 December 917 020 255 601
Provisions for an amount of euro 917 020 thousand as at 31 December 2013 (31 December 2012: euro 255 601 thousand) are intended to cover litigations and other contingencies related to the Group's activities, the more relevant being as follows:
Under the Group financial intermediation activity, Group customers subscribed, through Group network, debt instruments issued by Espírito Santo International, S.A. (‘ESI’) and its subsidiaries Espírito Santo Property, S.A., Espírito Santo Industrial, S.A. e Espírito Santo Irmãos, S.A., in the amount of euro 4 745 million, of which euro 3 259 million were held, as at 31 December 2013, by private and retail customers and euro 1 486 million were held, on the same date, by institutional customers. This situation is further explained in Note 47.
In 2013 ESI Group has prepared a reorganization plan and a deleverage program in order to be able to rebalance its financial position and proceed with the reimbursement of its liabilities. The measures included in the referred reorganization plan and deleverage program were integrated in a business plan and the cash flow projections for the 10-year period up to 2023 which were subject to analysis made under the review, led by the Bank of Portugal, which was concluded in the first quarter of 2014, of the loan impairment losses accounted for by the Group.
Considering the uncertainties associated with the ability to fully implement the internal reorganization plan and the deleverage program, the Board of Directors of ESFG approved an unconditional and irrevocable guarantee mechanism in favour of its subsidiaries (see Note 47) with the objective of covering the risk associated with the fact that EST issued commercial paper and bonds to customers through the respective networks. Based on this decision, the Board of Directors approved the set up of a provision amounting to euro 700 million in the consolidated financial statements of ESFG as at 31 December 2013, recognised under Provisions.
ESFG's Board of Directors believes, considering the information included in ESI business plan and cash flow projections for the 10-year period up to 2023, that the reimbursement of the debt instruments issued by ESI will be possibte through implementation of the defeverage program, the support of ESI shareholders, its capacity to obtain or renew credit lines in the financial markets and, additionally, through the support from ESFG.
Contingencies in connection with the exchange, during 2000, of Banco Boavista Interatlántico shares for Bradesco shares. The Group has provisions for an amount of approximately euro 55,3 million (31 December 2012: euro 60.3 million) to cover these contingencies,
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
e Contingencies in connection with legal processes established following the bankruptcy of clients which might imply losses for the Group. Provisions for an amount of euro 45.8 million as at 31 December 2013 (31 December 2012: euro 67.7 million) were established to cover these losses.
e Contingencies for ongoing tax processes. To cover these contingencies, the Group maintains provisions of approximately euro 22.1 million (31 December 2012: euro 36.1 million). The contingencies for ongoing tax processes includes euro 17.9 million related with the insurance business, of which euro 16,5 million relate to exercises already inspected by the Portuguese tax authorities and for which a judicial claim has been presented, being the total amount claimed of euro 19.4 million.
e The remaining balance of euro 93.8 million (31 December 2012: euro 91.5 million), is maintained to cover potential losses in connection with the normal activities of the Group, such as frauds, robbery and on-going judicial cases.
NOTE42- INCOME TAXES
The Group determined its current income tax for the year ended 31 December 2013 on the basis of a nominal tax rate of 2596, plus a Municipal Surcharge of 1.596, related to the activities undertaken in Portugal (Portugal activity and foreign branches). An additional tax up to 596 is due, related to a State Surcharge applicable to taxable income above euro 10 million. This 5% State surcharge is applicable for the years ended 2012 and 2013.
For the year 2013, deferred tax was broadly calculated based on an aggregate rate of 29.596, resulting from the sum of the corporate tax rate (2396) approved by Law No. 2/2014, of 16 January, Municipal Surcharge rate (1.576) and an average expected rate of State Surcharge (5%).
The deferred tax on tax losses was specifically calculated based on income tax rate (2396) approved by Law iNo. 2/2014, of 16 January, which amended IRC Code. This tax rate was enacted, or substantially enacted, at the balance sheet date.
The Portuguese Tax Authorities are entitled to review the annual tax return of the Group subsidiaries domiciled in Portugal for a period of four years. Hence, it is possible that some additional taxes may be assessed, mainly as a result of differences in interpretation of the tax law. However, the Board of Directors of the Group subsidiaries domiciled in Portugal are confident that there will be no material differences arising from tax assessments within ihe context of the financial statements.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The deferred tax assets and liabilities recognised in the balance sheet as at 31 December 2013 and 2012 can be analysed as follows:
Assets Liabilities Nel 31.12.2013 31.12.2012 31.122013 31.12.2012 31.12.2013 31.12.2012
(in thousands of euro)
Available-for-sale financial assets 69 956 80369 (63222) (102 845) 6734 (22476) Loans and advances (0 customers 414 445 412572 - . 474 445 412572 Property and equipment Bn 271 (8389) (8901) (8655) (3630) Intangible assets 13354 9474 {4520} - 8814 9474 Invesiments in subsidiaries and associates - - (47823) (163 986) (47823) (163936) Provisians 58 690 55302 (1638) (5516) 57052 49 786 Technical reserves - . (E931) (1851) (193) (1851) Pensions 263 063 257901 ( 495) (35507 262 568 222394 Long term service benefils 8283 7726 - - 8283 7726 Debt securilies issued - - { 462) (1010) ( 462) (1010) Other 5427 18957 - (4199 5427 14258 Taxlosses brought forward 20) 440 37 165 - 295 203 440 87 460 Deferrediax asset / (liability) 1096391 929 737 (128 580) (323 520) 367911 606 217 Deferred taxassets/liabilities offset (32 008) (168 784) 32008 168 784 - - Deferred tax asset / ability), net 1064383 760 953 (96 972) (154736) 567911 606 217 ye
Mnetted by Group entity The Group does not recognise the deferred tax liabilities on temporary differences of subsidiaries and associates for which it controls the reversion period and that are realised through the distribution of tax-exempt dividends.
Additionally, the Group does not recognise deferred tax assets on tax losses brought forward by certain subsidiaries, because it is not expectable that they will be recovered in a foreseeable future, A detail of the tax losses brought forward for which no deferred tax assets were recognised, is presented as follows:
Deadline 31.12.2013 31.12.2012 to deduction Tax losses brought forward
(in thousands of euro)
2012 - 2 850 2013 3 063 3941 2014 22 793 27 499 2015 25 554 34 123 2016 2493 2492 2017 5517 5 474 2018 4 744 - Undetermined 205 615 234 682
269 779 311 061
F-123
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AF 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The changes in net deferred taxes were recognised as follows:
Balance at the begining of the period (assets / (liabilities)
Change in the scope of consolidation Recognised in the income statement
Recognised in fair value reserve
Recognised in equity - other comprehensive income
Recognised in other reserves
Amount paid under the Special Regime for Debt Payments
Exchange differences and other
Balance at fhe end of the period (assets / (liabilities)
31.12.2013 31.12.2012
(in thousands of euro)
606 217 648 781
- 1981
321 625 41157
(22621) (68 240)
1 303 9 601
(7152) (24 881)
65 375 -
3 164 (2 182)
967911 606 217
The current and deferred taxes recognised in the income statement and reserves, during 2013 and 2012 is analysed in the following table. The amounts presented do not consider the effect of non-controlling interest.
Financial instruments
Loans and advances to customers Property and equipment Iutangible assets
Inveslments in subsidiaries and associales Provisions
Technical reserves
Pensions
Long term service benefits
Debt securities issued
Exchange differences and other Tax losses brought forward
Deferred taxes
Current taxes
31.12.2013
Recognised in the income statement (income) /expense
( 50 500) ( 62 719) 26
640
( 116 572) ( 6345) 80
3 668
( 557) ( 548) 9 142
( 97 940)
( 321 625) 157432 (164 193)
Recognisedin reserves
31.12.2012
Recognisedin the income statement (income) /expense
(iu thousands of euro)
21355
( 1712)
8418
28 470 (66 589) (38 119)
( 16679) ( 69 646) ( 153) 551
81 381
( 20 402) 623
4 005 459 1214 (2950) ( 19 560)
( 41157) 152 159
111 002
Recognised in reserves
68 240
(3 M7)
( 6354)
( 28D 25 162
83 520 44 973 128 493
The current tax accounted for in reserves during 2013 includes, a tax charge of euro 66 589 thousand (31 December 2012: euro 60 830 thousand) to the fair value reserve in relation to unrealised gains recognised. As at 31 December 2012 included also a tax credit of euro 5 553 thousand related with the pension benefits tax regime in accordance with Article 183 of Law no. 64-B/2011, of 30 December and a tax credit of euro 7 773 thousand from negative equity changes (primarily related to pension benefits).
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The reconciliation of the income tax rate can be analysed as follows:
31.12.2013 31.12.2012
% Amount % Amount
(in thousands of euro)
Profit before minority interest and taxes o) (1398 339) 482 706 Contribution to the banking sector 27289 27910 Profit before non-controlling interest and taxes for tax reconciliation pur poses (1371 550) 510 616 Statutory taxrate 25.0% 31,5% Income tax calculated based on the statutory tax rate (342 888) 160 844 Tax-exempt dividends 0.496 (5991) -4.0% { 19327) Tax-exempt profits (off shore) 1.796 (24 429) -9.9% (47949) Net income in consolidated investment funds 2.4% 33 063 - - 'Tax-exenpt/non-deductible realised gams/losses 13% (18 039) 13.3% 64 191 Non-taxable share of (profitVlosses in assaciates 0.1% { 905) -0.3% (1498) Unrecognised deferred tax assets related to
taxlosses generated in the year -15.9% 222 156 5.0% 24 124 Change in estimates 34% (47 642) -124% (59 684) Non taxable gains on acquisition / sale of subsidiaries - - -9 496 (45 503) Non deductible costs 1.5%% (2E O11) 51% 24 643 Rates and tax base changes resulting from IRC -2.3% 31 908 - - Other 0.7% 9585 2.396 11 161
121% (164 193) 212% 111 002
O includes the amount of euro (30 946) thousand (31 December 2012: euro (8 684) thousand) related to discontinued operations
The Portuguese Law No. 55-A/2010 of 31 December established a banking levy, which is not deductible for tax purposes, and whose regime was extended by Law no. 64-B/2011, of 30 December. During the period ended 31 December 2013, the Group recognised a cost of euro 27.3 million G1 December 2012: euro 27.9 million, which was included in Other operating income and expenses — Direct and indirect taxes (see Note 12).
NOTE 43- SUBORDINATED DEBT The balance subordinated debt is analysed as follows:
31.12.2013 31.12.2012
{in thousands of euro)
Bonds 1329 161 1 101 032 Loans 9 896 10 107 Perpetual bonds 64 131 65 343
1 403 188 1176 482
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The main features of the subordinated debt are presented as follows:
31.12.2013 Lsuër Désignation Currenty baue dale Ament issued Carrying Ink rest rale Matnrity (in lhousand of euro) BES Finance Subordinated perpetual bonds EUR 2002, 30243 23603 3.06% 2014 a) BES Finance Subordinated perpetual bonds EUR 2004 95767 20211 450% 2015 2) DES Finance Bonds EUR 2008 20000 20 165 8.73% 2018 BEST Bonds BRL 2007 AH 16891 CUI 100% ct 36 2014 BEST Bonds BRL 2008 8416 7918 CDI 100%+1.3% 2015 BEST Bonds BRL 2008 673 Soe IPCA 100% +83.3% 2015 BEST Bonds BAL 2008 Taro 544 CDI 100%+1.3% 2015 BEST Bonds EUR 2005 60 000 8863 Euribor 3M + 0.95% HO DEST Bonds EUR 2001 10000 273 Indexed to CMS 2033 DES Bonds EUR 2004 25000 22068 Euribor 6M + 1.25% 2014 DES Bords EUR 2008 41530 3848 Euribor 3M + 1% 2018 BES Bonds EUR ANS 638 450 93055 Euribor 3M + 8.5% 2019 BES Bonds EUR 2008 50600 50082 — Euribor 3M + 1.05% 2018 BES Bonds EUR 201 8H 8182 Fixed Rate 10% 2021 BES Bonds EUR 2013 750 600 751 964 Fixed Rale 7.125% 2029 BES Vida Bonds EUR 7002 45000 24295 Eunbor 3M + 2.20% 2022 BES Vida Subotdinated perpelual bonds EUR 2002 45000 20317 Euribor 3M + 2.50% 2014 a) BESV Subordinaled Loans EUR 2003 9669 9896 234% . b) ESFG Bonds EUR 2009 +00 000 3297 6.88% 2019 1260686 1403 18% 2) Call option date b) Undetermined The changes occurred in subordinated debt during the year ended 31 December 2013 are analysed as follows: Net Other movements 31.12.2012 Issues Repayments Repurchases (a) 31.12,2013 (in thousands of euro)
Bonds 1101 032 750 490 (1945) (511808) (8518) 1329 161 Loans 10 107 - - - (210 2396 Perpetual Bonds © 65343 - - (1318) 106 64 131
[176 482 750 400 (1945) (513 126) (3 623) 1403 188
Other movements include acerved interest, Far value adjustments and foreign exchange differences Issues include the amounts corresponding Lo debi replacements previously repurchased by the Group
In accordance with the accounting policy described in Note 2.8, debt issued repurchased by the Group is derecognised from the balance sheet and the difference between the carrying amount of the liability and its acquisition cost is recognised in the income statement. Following the repurchases performed in 2013 and 2012, the Group has recognised a gain of euro 4.6 million and of euro 39.6 million, respectively (see Note 12).
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands af euro, except when indicated)
NOTE 44- OTHER LIABILITIES As at 31 December 2013 and 2012, the balance other liabilities is analysed as follows:
31.12.2013 31.12.2012
(in thousands of curo)
Creditors Public sector 119 409 145 296 Collateral deposit on negative exposures on derivative contracts 215 617 173 955 Sundry debtors Stock-option plan (see Note 14) 2 185 Creditors from transactions with securities 60 433 89 357 Suppliers 67 195 56 457 Creditors from factoring operations 3044 3 509 Other sundry creditors 280 821 234 868 Creditors from the medical business 76i 548 Creditors fromthe insurance business 37 099 8982 Creditors arising out of direct insurance operations 26410 25 260 Creditors arising out of reinsurance operations 17 759 17 876 828 550 756 293 Accrucd expenses Long tenn service benefits (see Note 14) 30 376 28 691 Other accrued expenses 214 276 160 044 244 652 188 735 Deferred income 35 451 25 492 Other sundry liabilities Stock exchange transactions pending settlement 129 189 93 431 Foreign exchange transactions pending settlement 6 933 19 999 Other transactions pending settlement 101 058 184 492 237 180 297922 1345833 1268 442
As at 31 December 2013, the deferred income includes the amount of euro 21 989 thousand relating to the value of the remaining in force contracts acquired of BES Vida, after reinsurance transaction of life insurance risk portfolio held in the first half of 2013 (see notes 17 and 32). This amount will be amortised to income over the remaining life of the respective contracts.
The stock exchange transactions pending settlement refer to transactions with securities on behalf of third parties, recorded on trade date and pending settlement, in accordance with the accounting policy described in Note 2.6.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 45- SHARE CAPITAL, SHARE PREMIUM, OTHER EQUITY INSTRUMENTS, FAIR VALUE RESERVES AND OTHER RESERVES AND RETAINED EARNINGS
Share capital and share premium As at 31 December 2013, the authorised share capital of Espírito Santo Financial Group, S.A., was represented by 2
billion shares without nominal value, from which 207 075 338 shares (31 December 2012: 207 075 338) held by different shareholders were subscribed and fully paid as described below:
% Share capital 31.12.2013 31.12.2012
Espirito Santo Irmãos, Sociedade Gestora de Participações Sociais, S.A. 49.26% 10.0396
Espírito Santo Intemational S.A. 0.1596 33.38% Other 50.59% 56.59%
100.00% 100.00%
On 26 April 2012, ESFG issued 102 040 816 ordinary shares at an issue price of euro 4.9 each, totalling euro 500 million. From this amount, euro 398 million euro was allocated to the share premium. The costs incurred and directly attributable to issuing the new shares, in the amount of euro 6.4 million, were also recognised under share premium.
Treasury shares
Treasury shares as at 31 December 2013, in the amount of euro 3.5 million (31 December 2012: euro 36 million), correspond to 665 652 ESFG shares (31 December 2012: 6 811 569) with an acquisition cost of euro 5.2 per share (31 December 2012: euro 5.28 per share).
Preference shares
In June 2007, ESFG International Limited (“issuer”), a fully owned subsidiary of ESFG, issued euro 400 million series À non-cumulative guaranteed step-up preferred securities. These securities, with a face value of euro 50 thousand per security, are listed on the Luxembourg stock exchange. During the year ended 31 December 2012, the Group acquired euro 16 450 thousand preference shares for an acquisition price of euro 6 197 thousand, having generated a gain net of taxes, recognised in Other reserves and retained earnings, in the amount of euro 10 253 thousand. During the year ended 31 December 2011, the Group acquired euro 325 750 thousand preference shares in scope of the exchange offer over ordinary shares referred to above. The Group recorded a capital gain, net of taxes in the amount of euro 81 803 thousand recognised in Other reserves and retained earnings.
As at 31 December 2013, there were euro 52 950 thousand outstanding preference shares (31 December 2012: euro 57 800 thousand) for a total nominal amount of euro 52 950 thousand (31 December 2012: euro 57 800 thousand).
These preferred securities pay non-cumulative preferred dividends, when, as and if declared by the Board of Directors of ESFG International Limited, annually in arrears on 6 June in each year commencing on 6 June 2008 up to and including 6 June 2017 at an annual rate of 5.75396 p.a. of the respective nominal value. Thereafter, the preferred dividends will be payable, when, as and if declared by the Board of Directors of ESFG International Limited, quarterly in arrears on 6 March, 6 June, 6 September and 6 December each year, commencing on 6 September 2017 at a rate of 2.130% above the 3 months Euribor.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The preferred securities are perpetual securities and have no fixed redemption date. However, these securities may be redeemed, at the option of ESFG International Limited, in whole but not in part, on 6 June 2017 or on any preferred distribution payment date falling thereafter. Such redemption is subject to the authorization of ESFG and the Supervisor Authority.
ESFG unconditionally guarantees, on a subordinated basis, the payment of distributions on the preferred securities when, as and if declared by the Board of Directors of the issuer, and payments on liquidation of the issuer or on redemption. By virtue of the scope of the guarantee the rights of the holders of these preference securities against ESFG are equivalent to those which such holders would have had if they had instead held preference shares issued directly by ESFG whose terns are identical to the terms of the preferred securities and the guarantee taken together.
Considering the features of these preferred securities, they were considered, following LAS 32, as equity instruments of the Group. On that basis, the total proceeds from the issue, net of expenses incurred, totalling approximately euro 394.5 million, was taken to equity on the date of issue. The outstanding amount as at 31 December 2013, net of expenses, is euro 51 367 thousand (31 December 2012: euro 55 978 thousand). In accordance with the accounting policy described in Note 2.9, preferred dividends will be recorded as a deduclion to equity when declared.
Other equity instruments
As described in iNote 39, during the year ended 31 December 2013, the Group acquired euro 135.6 million of the euro 500 000 000 Fixed Rate Step-Up Notes due 2025 with 10 000 warrants, in scope of the exchange offer over bonds exchangeable into ordinary shares of Banco Espirito Santo, S.A. As a result of this transaction, as at 31 December 2013 there were 915 outstanding warrants in the amount of euro 10 849 thousand (31 December 2012: 3 587 warrants in the amount of euro 42 509 thousand) which are recognised in equity net of expenses by an amount of euro 10 539 thousand.
In addition, as described in Note 39, during 2011 ESFG issued euro 130 416 000 Convertible Bonds. Following this issue, the Group recognised in equity the amount of euro 16 950 thousand related to the conversion option which corresponds to an equity instrument in light of IAS 32.
Capital reserves non distributable
The capital reserves non distributable in the amount of euro 700 970 thousand relates to a special non-distributable reserve account resulting from the cancelation, in 2011, of the nominal value of the shares and the subsequent reduction of the accounting value of the authorised and issued share capital from euro 10 per share to euro I.
Legal reserve
Under the Luxembourg law, a minimum of 596 of the profit for the year must be transferred to the Legal reserve until this reserve equals 10% of the issued share capital. This reserve is not available for distribution.
Fair value reserve
The fair value reserve represents the amount of the unrealised gains and losses arising from securities classified as
available for sale, net of impairment losses recognised in the income statement in the year/previous years. The amount of this reserve is shown net of deferred taxes and non-controlling interest.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
During the years ended 31 December 2013 and 2012, the changes in these balances, net of non-controlling interest, were as follows:
Falr rane recense Cher comprehensive leout, cher reserves and retained earnings Actuarial wher Arie, br, Deferredter Tatal bie gatas and Exchangt Cipit Onher reserves ee and sie rasene valatretexe ` (loues) ne differences Legdrerere ‘pee rolatte and rebinéd retabned Toul altares Minute mm earnings (In chouzanda of turo)
Balance as ai 31 December 2011 (neg 25005 (155 624) (2872212 18562 31364 7095278 31449 581123 416 499 Transfer lo rererves - - - ~ - - - 121351 nas 121352 Coits with capital increase of subsidiarity - - - - - - - (415 (3419 (UI Rrpachase and echange of own othes SN Dment - - - - - - 10715 10715 13715 Transectens on subsidiaries preference shares - . - - - - 1271 1221 Fait Dividends on preference shares - - - - H - - (3963) (390) (5:5 Davidinds on perpetual bonds - - - - - - - (99 (43 (m Achuri gant om defined benefit obligation, netof ares - - - (45529) . - - - (10515 (15575) Changes in far vafe 1390 (uum 151391 - - H - - - 191351 Exchange differences - - - - Q1 456) - - (uas) (11455) ber equity moverarnla of uxsociated compere - ~ - - - - (249 (268) Qum Transactions with non-centotang interest - - - - - - 45428 ELO) A562 Obert - - - - - - Wal HEU] L on
Bilore as ai 31 December 2012 41308 (15538 25771 (252797) 7106 32135 700970 203045 690 683 T6455 Transferto reserves - - - - - - - 3085 313613 31363) Repurchase and exchange of own other equity msuuments - - - - - ne HO HUH Trantaciiong on sobsidiaries preference shares - - - - - - - 3:8 ash 348I Dividends on grefetence theres - - - - - - ($185) (18) (518) Dividends en perpetsal bonds - - (6x (o (o Acii gains from defined bene Al ebEzaBon, neto (ates - - - (1215 - - - - (H1 aus Charges m Par valve (33085) sou (35919) - - - - - - (1859) Echange differences - - - - (863) - - . (152) — (1053) Cher equity movements of associated companies - - - - ^ - - “él jM 7H Transactions ith nen-controlEng interest - - - - - - 28) 257 26T Others - - - - - ton ton 1071
Bubnce as at 34 December 1013 24216 (56M) (3108) {247 087) (1525 aki 700970 550 714 535518 982310
The fair value reserve is analysed as follows:
31.12.2013 31.12.2012
(in thousands ofeuro)
Awwortised cost of available-for-sale financial assets 9221 388 11 090 158 Accumulated impaimxnt losses recognised (318 045) (254 M1) Anurtised cost ofavailable-for-sale financial assets, net of impairment 8903 343 10 836 017 Fair value ofavailable-for-sale financial assets 8929778 11041235 Net unrealised gains (losses) recognised in the fair value reserve 26435 205218 Fair value reserves related to securities reclassified as held-to maturity investments (Note 27) (11781) (16655) Income taxes (6585) (49284) Fair value reserve of associates 3207 2381 Net fair value reserve 11 276 141 660 Non-controlling interest ( 14 484) (115 889) Fair value reserve attributable to equity holders of the Company (3 208) 25771
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movement in the fair value reserve, net of deferred taxes, impairment losses and non-controlling interest, is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Balance as at 1 January 25 771 (165 624) Changes in fair value 60 194 360 204 Disposals during the year | (131292) ( 167 091) Impairment recognised during the year 32 190 28 123 Deferred taxes recognised in reserves during the year 9 904 (45 166) Transactions with non controlling interest 25 15325
Balance as at 31 December (3 208) 25 771
NOTE 46- | NON-CONTROLLING INTEREST
As at 31 December 2013 and 31 December 2012, non-controlling interest can be analysed as follows:
31.122013 31.12.2012
Income Income Balance sheet statement Balance sheet statement
(in thousands of euro)
BES Group 4 554 752 ( 379 120) 5 006 540 ( 5178) Preference shares issued by BES Finance 159 342 - 193 289 - Other equity instruments issued by BES Group 29 162 - 29 295 - Bespar 605 261 ( 545) 605 806 51328 BES Vénétie 53 590 1 488 53 503 4 198 ES Saüde - - - ( 948) Pastor Vida - - - 1431 Other 25 194 7562 33 858 1240 5 427 301 (370615) 5922 291 58 071
Preference shares issued by BES Finance
Preference shares issued by BES Finance correspond to 450 thousand non-voting preference shares, which were issued and listed in the Luxembourg stock exchange in July 2003. In March 2004, 150 thousand preference shares were additionally issued forming a single series with the existing preference shares. The face value of these shares is euro 1 000 and are fully booked under non-controlling interest. The total issue (euro 600 000 thousand) is wholly, but not partially, redeemable at its face value at the option of the issuer, as at 2 July 2014, subject to prior approvals of BES and the Bank of Portugal. During the year ended 31 December 2012, the Group acquired 18 624 preference shares, having recorded a gain, net of taxes and non controlling interest, in the amount of euro 1 271 thousand recognised in Other reserves and retained camings. During the year ended 31 December 2013, the Group acquired 33 947 preference shares, having recorded a gain, net of taxes and non controlling interest, in the amount of euro 1 668 thousand recognised in Other reserves and retained earnings.
As at 31 December 2013, there were 33 947 outstanding preference shares in the amount of euro 33 947 thousand (31 December 2012: 193 289 and euro 193 289 thousand, respectively).
These preference shares pay an annual non-cumulative preferred dividend, if and when declared by the Board of Directors of BES Finance, corresponding to an annual rate of 5.5896 p.a. on the nominal value. This dividend is paid
F-131
ESPÎRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
on 2 July of each year, beginning 2 July 2004 and ending 2 July 2014. If BES Finance does not redeem these preference shares on 2 July 2014, the applicable rate wiil be 3 months Euribor plus 2.65% p.a., with payments on 2 January, 2 April, 2 July and 2 October of each year, if declared by the Board of Directors of BES Finance.
"These shares are subordinated to any BES liability, and are “pari passu" in relation to any preference shares that may come to be issued by the Bank. BES unconditionally guarantees dividends if previously declared by the Board of Directors of BES Finance and principal repayments related to either of the above mentioned issues.
Considering the features of these preference shares, they were considered, in accordance with TAS 32, as equity instruments of BES Group being classified as non-controlling interest at ESFG level. On that basis, and in accordance with the accounting policy described in Note 2.9, the dividends related with these preference shares are recorded as a deduction to equity when declared.
Other equity instruments issued by BES Group
The BES Group issued in 2011, perpetual subordinated bonds with non-cumulative discretionary interest in the total amount of euro 320 million,
These bonds pay a non-cumulative interest, only if and when declared by the Board of Directors, at an annual rate of 8.5%. This discretionary interest is payable semi-annually. These securities are redeemable at the option of BES Group in full, but not in part, after 15 September 2015, subject to the prior approval of Bank of Portugal.
Considering the features of these perpetua! subordinated bonds, they qualify as equity instruments of BES Group in accordance with IAS 32 being classified as non-controlling interest at ESFG level. On that basis and in accordance with the accounting policy described in Note 2.9, the distributions related with these bonds will be recorded as a deduction to equity when declared.
During the year ended 31 December 2013, the Group paid interest in the amount of euro 2 191 thousand (31 December 2012: euro 1 864 thousand) resulting in a reduction in equity amounting to euro 599 thousand net on tax and non-controlling interest (31 December 2012: euro 519 thousand). As a result of an exchange offer for BES shares, occurred in 2012, Other equity instruments issued by BES Group reduced by an amount of euro 286 717 thousand.
F-132
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The movement in non-controlling interest in the years ended 31 December 2013 and 2012 can be analysed as
follows:
31.12.2013
31.12.2012
(in thousands of euro)
Non-controlling interest as at 1 January 5922291 Changes in the scope of consolidation 34 020 Transactions with non-controlling interest (53214) Increase in share capita! of subsidiaries 158 702 Issuance/(repurchase) of perpetual preference shares (29 519) Dividends paid on perpetual bonds (1591) Actuarial gains/(losses) from defined benefit obligation, net of taxes (71 540) Dividends paid (4 490) Dividends paid on preference shares (5048) Treasury shares of subsidiaries 7702 Capital increase costs - Changes in fair value reserve (94224) Other comprehensive income fromassociates 1211 Exchange differences and other (66 384) (Loss) / profit for the ycar (370 615)
Non-controlling interest as at31 December 5 427 301
NOTE 47- | OFF-BALANCE SHEET ITEMS
4 973 023 (27 606) (72954) 758336 (15417)
(1345) (125307)
(6502) (4388) (8730) 448 182 (9 194) (43 878) 58 071
5 922 291
As at 31 December 2013 and 2012 off-balance sheet items, excluding the derivative financial instruments, can be
analysed as follows:
31.12.2013
31.12.2012
(in thousands of euro)
Contingent liabilities
Guarantees and stand by letters of credit 8031816 Assets pledged as collateral 20 425 200 Open documentary credits 4 234 660 Other 278 586 32 970 262 Commitments
Revocable commitments 7107 506 Irrevocable commitments [ 800 185 8 907 691
8 427 956 21 632 555 3 780 554 531 850
34 372 915
5 462 823 3 461 701
8 924 524
Guarantees and standby letters of credit are banking operations that do not imply any out-flow by the Group.
F-133
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013, the balance assets pledged as collateral include:
e Securities pledged as collateral to the Bank of Portugal in the scope of a liquidity facility collateralised by securities for an amount of euro 18.8 billion (31 December 2012: euro 19.6 billion};
e Securities pledged as collateral to the Portuguese Securities and Exchange Commission (CMVM) in the scope of the Investors Indemnity System (Sistema de Indemnização aos Investidores) for an amount of euro 17.2 million (31 December 2012: euro 20.8 million);
e Securities pledged as collateral to the Deposits Guarantee Fund (Fundo de Garantia de Depósitos) for an amount of euro 82.6 million (31 December 2012: euro 82.6 million);
e Securities pledged as collateral to the European Investment Bank for an amount of euro 1 340.0 million (31 December 2012: euro 1 822.5 million).
The above mentioned securities pledged as collateral can be executed in case the Group docs not fulfil its obligations under the terms of the contracts.
Documentary credits are irrevocable commitments, by the Group, in the name of its clients, to pay or order to pay a certain amount to a supplier of goods or services, within a determined term, against the exhibition of the expedition documentation of the goods or service provided. The condition of irrevocable consists of the fact that the terms initially agreed can only be changed or cancelled with the agreement of all parties.
Revocable and irrevocable commitments represent contractual agreements to extend credit to Group's customers (eg. unused credit lines). These agreements are, generally, contracted for fixed periods of time or with other expiration requisites, and usually require the payment of a commission. Substantially, all credit commitinents require that clients maintain certain conditions verified at the time when the credit was granted.
Despite the characteristics of these contingent liabilities and commitments, these operations require a previous rigorous risk assessment of the client and its business, like any other commercial operation. When necessary, the Group require that these operations are collateralised. As it is expected that the majority of these operations will mature without any use of funds, these amounts do not represent necessarily future out-flows.
Additionally, the off-balance sheet items related to banking services provided are as follows:
31.12.2013 31.12.2012
(in thousands of curo)
Securities and other items held for
safekeeping on behalf of customers 62 223 560 63 285 779 Assets for collection on behalf ofclients 242 383 294 295 Securitised loans under management (servicing) 2 486 012 2712022 Discretionary portfolio management 7 209 297 9 649 908
72 161252 75 942 004
F-134
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
In the scope of the activity regarding the management of custoiners funds and considering the risk profile of each customer, the Group offers a variety of investment solutions which include the direct subscription of debt instruments issued by several entities, namely entities included in ESFG consolidation scope and other related parties from the non-financial sector of Espírito Santo Group. In this context, the Group makes available to customers information on the risks associated with the subscription of such instruments as it is required by the applicable regulations. These debt instruments which are held under custody are accounted as an off-balance sheet item under Securities and other items for the safekeeping on behalf of clients.
Under this activity, Group customers subscribed debt instruments issued by Espírito Santo international, S.A. (‘ESI’) and its subsidiaries Espirito Santo Property, S.A., Espírito Santo Industrial, S.A. e Espírito Santo Irmãos, S.A., in the amount of euro 4 745 million, of which euro 3 259 million were held, as at 31 December 2013, by private and retail customers and euro 1 486 million were held, on the same date, by institutional customers (see Note 41).
Additionally Group retail and private customers subscribed debt instruments issued by Rio Forte Investments, SA. Espírito Santo Saúde, S.G.P.S., S.A., ESPART - Espirito Santo Participações Financeiras, S.G.P.S., S.A., Quinta da Foz and Euroamerican Finance, S.A., in the amount of euro 479 million, euro 38 million, euro 24 million, euro 13 million and euro 9 million, respectively, with reference to 31 December 2013.
NOTE48- ASSETS UNDER MANAGEMENT
As at 31 December 2013 and 2012, the amount of the assets under management of the Group is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Securities investment funds 4 117 166 5 190 265 Real estate investment funds 1079 813 1075 678 Pension funds 1 906 717 1 783 359 Bancassurance 159 965 89 662 Portfolio management 1 694 103 2 875 827
Others 2388 378 1378 639
11346 642 ]2 393 430
The amounts recognised in these accounts are measured at fair value determined at the balance sheet date. In accordance with the legislation in force, the fund management companies and the depositary bank are jointly
liable before the participants of the funds for the non fulfilment of the obligations assumed under the terms of the Law and the management regulations of the funds.
F-135
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 49- RELATED PARTIES TRANSACTIONS
Following the definition of related party established by IAS 24, related parties to ESFG include associates, pension funds, Board members and entities controlled or significantly influenced by any of these individuals.
The entities considered to be related parties to ESFG, as defined by LAS 24, are as follows:
Compay
2B. Capital Losembourg General Partners SARL
2B CspüslLawmbourg SCA SICAR
2BCapilal, SA
ACRO, Sociedade Gestora de Partiipagórs Sociais, SA. Adepa Global Services
Advance Ciclone Syslems, SA
Agência de Visgens Tagus, SA.
Agência Receptivo Praia do Forte, Lida
Agribahia, SA
Agriways, SA
AMeia do Meco - Sociedade para o Desenvolvimento Turislko, SA Altus Finance SA
Angra Moura-Sockedade de Adumisiração de Dens, S A. Aroundimpaci, Lda
Arrábida - Fundo Especial de Investimeato Imobibáro Ascendi Group, SGPS, SA
Ascendi Pinhal Interior Estradas do Pinhabntenor, SA AUgnlic Meats - Industria € Comércio Agro A Emenlar, SA Alr- Actividades Turialkas € Represealagdes, Lda
Auviss -Autovia de Los Viedos, SA
Aveiro Incorporated
Baeza Empreendimentos Imobiliários Ltda.
Bencao Delle Tre Venezie SPA
BA PAR Incorporação Imobitára Lida
Beach Heath Investment, Lid
BEMS, SGPS, SA
BES, Companhia de Seguros, SA
BIO-GENESIS
Cainga Fmpresadamentos Imobibários Lide.
Calradas y Caminos del Sor, SL
Caravela Balanced Fund
Caravela Defensive Fund
Cartagena Empreendmentos Imobiliários Lida,
Casa da Saudade, Admins tração de Bens Móveis € Imbveis, SA. Casas da Clade - Residências Sénior, SA
Cerca da Aldeia - Socrednde Imobisáris, SA
Cidadeplatma - Conslrução SA
Cimenta - Empreendimentos Imobibários, SA
Clarendon Properties, Inc.
Clinica Parque dos Poetas, SA
Chia - Hospital Privado de Avero, SA
CLN Magoôla Finance 2018
Club de Campo Villar Ollab, SA
Clube de Campo da Comporta -Actividades Desportivas e Lazer, Lda Clube Resalencial da Boavisla, SA
Clup Vip - Markeling de Aconlecimentos, SA
Coimbra Jardim Hotel - Sociedade de Gestão Hoteleira, SA. Companhia Agricola Botucata, SA
Companhia Drasdeim de Apropecusria Cobrape
Comporia Dunes Hóteis & Golfe - Promoção e Desenvolvimento de Aclivatades Holekiras e Turíslicas, SA Comporia Links Golfe - Promoção € Exploração de Actividades Turisticas, SA Comporta Links Holdis - Promoção e Exploração de Actividades Hoteleias, SA Construcciones Samer, SL
Construtora do Tamega (Madeira) SA
Construtora do Tarega Madera SOPS SA
Coporgesl
Coreworks - Proj Crcoro Sisl. Elec, SA
Dassa Invesiments SA.
Diva, Sociedade de Investimentos Imobililnos, SA. Domática, Electrónica e Informática, SA
ES -Espfio Santo, Mediação Imobihária, SA.
ES. Assel Administration, Ltd.
ES. Talemalional Overseas, Ltd.
ES. Resources Overseas, Lid
EST, Fmance Lid
Fasteleo - Consahona e Comunkação, SA
Fdenred Portugal SA.
Emperk Aparcamienios y Servicios SA
Fakrott SA
ES Arrendamento - Funda de Investimento [molhado Fechado para Arrendamento Habitacional
F.136
Company oni)
ES Private Fquity, Lid
ES Saúde - Residência com Servigos Senior, S.A.
ES Viagens e Turismo, [da
Escae Consultora, Admmistração e Empreendimento, Lida Escopar- Sociedade Geslora de Partipagóes Sociais, SA
ESDI Admmistração e Fanicipações Lida
Esegur - Empresa de Segurança, SA
Esger - Empress de Serviços € Cousuboria, SA
ESH Parcipagao e Administragao de Bens Próprios Lida
Esiam- Espirito Sento Intemational Assel Menagemenl, Lid
Esim- Espirito Santo Imobiliário, SA
Zeta - Espirito Santo Participagoes Financeiras, SGPS, SA
ESPB OL Desenvolvimento Imobiliano Lida.
ESPD 02 Desenvolvimento Imobiliario lida,
ESPB 04 Desenvolvimento Imobiliarx Lida,
ESPD Admmnistraçõe e Partxipacdes Tida
Espinto Santo - Unidades de Saúde e de Apoio à Tercera Made, S.A. Espirito Santo Cachoeira Descavolvimenro Imobibário Lida
Espinta Santo Campinas Desenvolvimento Imobihário Lida
Espírito Santo Control SA
Espirio Santo de Ornie
Espirito Santo Kare Bond
Espírito Santo Guarujá Desenvolvimento Imobisário Lida
Espirilo Santo Heath Cere Inveslments SA
Espirilo Santo Hotéis, SGPS, SA
Espirito Santo IBERIA T
Espirito Santo Indaiatuba Desenvavenenlo Imobihário Lida
Espirito Santo Industria! BVI} SA
Esphito Santo Industria! ( Porta gal )+ SGPS, SA
Espirito Santo Industrial SA
Espirito Santo International (DVI) SA
Espirito Santo International SA
Espino Santo Irmãos - Sociedade Geslora de Partkipscóes Sociis, SA Espito Saalo ILaliba Desenvolvznente Imobiliário Ltda
Espkito Santo Plano Dinamico Fondo de Investimento A fterto Flexível Esphito Santo Primavera Desenvolvimento Imobilidrio Ltda
Espirito Santo Property (Brasil) S/A
Esphxo Santo Property España, SL.
Espirito Santo Property [lod mg (BVDSA
Espirito Sento Property IIo ng, SA
Espino Santo Property SA
Espirito Sante Resources (Portugal) SA
Esphrito Santo Resources SA
Espirito Santo Resources, Hd
Espirito Sento Saúde SGPS, SA.
Espírito Santo Saüde-Residencia com Serviços Senior, SA. SGPS, SA. Espírito Santo Saüde-Servigos, ACE
Espirito Santo Servkes, SA
Espinto Santo Tourism Europe A SA
Espinlo Santo Tourism, Lid
Espirito Santo Venture Ltd
Espírito Santa Viagens - Consulioris e Serviços, SA
Espirilo Santo Viagens - Sociedade Gestora de Panicipações Sociais, SA Estorl Ino
Euroamerican Finence Corporalinn, Inc.
Euroemerican Finance SA
Enroaibatic, Inc.
Europe Assistance - Companhia Portuguesa de Seguros de Assistência, SA Fafer - Empreendimentos Turisticos e de Conslrução, SA
FOF - Fundo de Investimento Imobibino Fechado Corpus Christi Fimes II - Fondo de Investimento [mobibário Fechedo
Fimes Oriente - Fondo de Investimento Imobibário Fechado
Fm Salulia - Consultoria e Gestão de Créditos, SA
Fravei- Sociedade Gestora de Participações Sociais, SA
Fundes FEIIF-Fundes Especial de Investimento [mobikário Fechado Fundo Bem Comum SCH
Fundo de Capial de Rico Espirito Santo Ventures Inovação e Intemacionalização FungepiBES undo de Geslão de Palrimon3 Imobikário -Fungept BES Fongere - Fondo de Gestão de Patriménio Imobibário
Ganadera Corina Campos y Haciendas, SA
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands af euro, except when indicated)
Company
Qestres - Geslão Estratégica Espirito Santo, SA
Global Active - Gestão Pan. Soc, SGPS, SA.
Gop gles Marine, Lid
Group Credit Agricole
Groupe CFCA SAS
Grupo Proyectos y Servicios Samon, SA
Guaraiuva mpreendimento Imebilidrios Lida,
HCI - Heahh Care Intemational [ac
HDE - Serviços de Turismo e Imobihário, SA
Ilerdade da Comporia - Actividades Agro Silvicolas e Turlslicas, SA Henlade da Comporta - Actividades Holeteiras, Tudalwas e Culurais, Lda. Henlade da Comporta : Fundo Especial de [ovestimento Imobiliário Fechado Hic - Centra de Cogerezáo, SA
HME Gestão Hospitalar
Hospital da Arcdbata - Gaia, SA
Hospitalda Laz- Centro Cleo da Amadora, SA Hospitalda Laz, SA
HospaalResidéncialdo Mar, SA
llospor- 1lospilais Portugueses, SA
Hoteis TivoA, SA
Holelagos, SA
LA.C UK, Limited
Iber Foods - Produtos Alrxnlares ¢ Ino'ógicos, SA
Tar Leasing Algérie SPA
Impcrescente-Fundo de Investimento Imobiário Fechado Imopea, SA
Imoprime FIIF- Fundo de Investimento mobilidro Fechado Instituto de Radiologia De. Id45a de Oliveira - Centro de Radiole pia Médica, SA. Inter-Ailintico, SA
Locarent -Companhia Portuguesa de A luguer de Vialuras, SA Late Dois - Empreendimentos Turisticos SA
LusZano Propel Finance No. FTC
Luzboa Pois, SA
Luzbea Quatro, SA
Luzbea Trés, SA
Luzea Um, SA
Luzbea, SA
Mergrimar - Mármores ¢ Granitos, SA
Marmoles - Sociedade de Promoção e Construção de Holes, SA Mariela! - Mármores e Meteriais de Construção, SA
MCO3 — Sociedade Geslora de Fundos de livesimento Mobiliário Mediterranean Srategical Inveslments SA
Metal - Lobos Serralharia e Carpintaria, Lda
MMCi - Mubanddia, SA
Mobile World - Comunicações, SA
Moza anco SA.
Mozambique Agricubural Corp SA
Muhiger : Sociedade de Gestão ¢ Inveslimento Imobili rio, SA Mukipessoal Recursos Humanes SPS
Mulinrave Photonics, SA
Mundo Vip - Operadores Turísticos, SA
Nanum SA.
Net Viagens - Agência de Visgeus € Turismo, SA
Novagesl Assels Management, Lid
Nutrigreen, SA.
‘Opes Angola, SA
Opca Moçambique, Lda
Opcalekcom - Inftaestuturas de Comunicação, SA
Oprras - Engenharia, SA
Opay - SGPS, SA
Opway Pngenharia Beasd SA
Opway Imobiiária, SA
Opway México SA de CV
Opway Moçambique - Engenhana, Lda
Opway NT-Novas Tecnologias, SA
Opway-Somagve, Grupo Consisutordo Data Cenler PT, ACE Orey Reabilitação Urbana - Fondo de Investimento Imobiliário Fechado Quisystéms, SA.
Pakexpo - Imagem Empresarial, SA
Paraguay Agriculiural Corporation SA
F-137
Company (coal)
Pálio das Andormhas - Investimentos Imobikârios Lia Pavido Tirasil - Pré-Fabricação, Tecnologia e Serviços, Lda. Pavicentro - Pré-Fabrcagdo, SA
Paviħs - Prê-Fabricação, SA
Paviaeu - Materias Pré-Fabricados, SA
Pavitel SARL
Persoada - Sockvade de Perfurações e Sondagens, SA Placon : Estudos e Projectos de Construção, Lda
Pojuca, SA
Pontave -Construções, SA
Praia do Porte Operadora de Turismo, Lida
Promorai - Tecnologias de Caminhos de Ferro, SA Prosport, SA
Quinsy Technologies Corp.
Quinia da Baroneza Empreendimentos e Parlkcipagóes, Ltda Quinta da Foz - Empreendimentos [mobitdrns SA Recigreen - Reck bgeme Costão Ambiental SA
Recigroup - Indvsiriss de Reciclagem, SOPS, SA
Recipay - Pngenharia e Pavimentos, Unipeasos] Lda Recipneu - Empresa Nacional de Recklagemde Pneus, Lda Ribeira do Marchante, Admmnistrção de Bena Móveis e Inóves, SA. Rio Forte Invesimenta SA
Ricforte (Portugal), SA
Rsefarte Investment Ho mg Bresil VA
Riefa:te Investment Hong Mozambique, SGPS, SA
RML - Residência Medicalieada de Loura, SGPS, SA
Rodi Sinks & Meas, SA
Salgar hvesiments SL
Santa Mônica - Empreendimentos Turislicos, SA
Saramagos S/À Empreendinentos e Parlgipações
Sam Bank
SCA Mandel Parinera
Series - Serviços Imobihários Espmio Santo, SA
Sintra Empreendimentos Imobihánios, Lida
Simone Empreend mentos fmobiBários Lida.
Suges, SA Desenvolvimento de Projectos de Energia Sociedad Agricola Golondrina, SA
Sociedade Consinitora Colombiana, SA
Socedade de Administração de Bens - Casa de Bons Ares, SA. Sociedade Ges tora do Hospital de Loures, SA
Socélé Congolsise de Construction et Travaux Pubiques, SARL Solíénas - Operadores Torlsticos, Lda
Sopol - Concessões, SGPS, SA
Sotal - Sociedade de Geslho Holetera, SA.
Sousntamp, SGPS, SA
Space - Sociedad Peninsularde Aviación, Comércio e Excursiones, SA SuEzlor - imobibária do Sul, SA
Sorgicare - Unèlades de Saúde, SA
Synergy Industry and Technology, SA.
TA DMC Brasil - Vagens e Turismo, SA
Temas de Beaganga Participações, Lida
The Allantic Comp any ( Portugal) - Turismo e Urbanização, SA Timeantube Comte e Servos de Confecções, Lida Tivok Eoores dences Praia do Forte Lida
Tivoli Gare do Oriente - Sociedade de Qeslão Elotelerra, S.A. TLCI2. Soções Integradas de Telecomunicações, SA TOPA DMC Viajes, SA
Top Atlinlico - Viagens c Turismo Moçambmyue Lda
Top AlBntico - Viagens e Turismo, SA
Top AlÉntico DMC, SA
Top Pariner - Viagens & Soluções Empresariais, SA Transconlmental- Empreendimentos Hoteleiros, SA Torifonle, Empreendimentos Hotelegos, SA
Turi rader - Sociedade de Desenvolvmenlo Tur lie, SA Unire - Cartão Interascionalde Crédio, SA
Ushuai - Gestão ¢ Trading Intemscional Limted
Vili Lusdano : Unkiades de Saúde, SA
Viveros da Herdade da Comporta - Produção de Plantas Omamentass, Lda Watson Boown HSM, [td
Winpart Lda
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the total amount of the assets and liabilities of the Group with associates or related companies, is as follows:
3[.12.2013 31-12-1012 Assels Liabillhes Guatastées Income Fxpemses Aach, Uabllities Cuuránicts Income Expeases tin (hongands dl eura)
EFSI SA. 1119575 965 - 64 025 49 1056010 5 176 - 47355 3 ASCENDI GROUP SGFS 378 803 13398 10924 25609 103 299 462 3781 18164 112778 2 ESR LTB 221002 1712 - 19985 238 273 587 2461 - 48303 22 ASCENDI PINHAL INTERIOR 141 765 A 650 10 442 4426 - 93356 2051 15374 3073 H LOCARENT 109 529 1341 H 3386 9873 129818 37A - 2691 1L 127 ES SAUDE 61397 25077 4003 402 - 63650 Dun 24 269 464 2 SAXO DANK ATTIT 1104 - 1884 - 20 054 17 - - - NANIUM 30925 512 206 201 - 35327 4212 18319 306 4 CONSTRUCCIONES SARRION 15393 - sus n1 . 16327 - 8745 233 - OPWAT 1364 2371 44655 157 - 6331 35083 48029 361 225 FSEGUR 6933 12 2273 2478 612 7322 20 2105 1355 722 SOUSACAMP 5357 H - - 351 3764 - - 120 - DIRECTORS 3506 1855 - 5 1 4435 1690 - 19 EMPARK 3315 - 1123 1586 - 49 179 - 4684 3372 246 ES TOURISM 2570 a H [| - 699 562 - TU - EUROP ASSISTANCE 1423 2519 25 78 15243 1468 2713 25 85 14 862 BES SEGUROS 733 IT 550 - 4187 22 1148 18 505 - +05] 16 MARINOTEIS HD 50 n 6 - 963 4 n 43 4 TOP ATLANTICO 153 A3 - 3 BRT 240 37 H 4 1235 AENOR DURO - ` - - - 271 887 341 15 006 8935 - ES RMAOS - 7194 - 5 3 104 570 5 H 4708 ESPIL - 76 - 1538 l 43319 as - A 528 PALEXPO - 26 H 7166 T4 26 531 SCUTVIAS - . - - 7147 - 6545 2631 3081 ESR (P) - L18 - - su . 75 - H 493 Oibers 143 855 111283 21989 9725 7140 17574 51283 28289 187% 5694
2304 780 192525 115 253 139 516 35 130 2720857 119219 195815 163 864 37939
— E E —— ——— —
Balances and transactions with the above referred entities relate mainly to loans and advances and deposits in the scope of the banking activity of the Group.
The costs with salaries and other benefits attributed to ESFG key inanagement personnel, as well as the transactions performed with ESFG key management personnel are presented in Note 13.
As at 31 December 2013 and 2012, the total amount of the assets of the Group with associates or related companies, by residual term is as follows:
More than 5
3- 6 months 12 months 1-5 years years Total (in thousands of euro) 2013 1 406 551 444 266 76 093 387 871 2314781 2012 1430353 500 171 342 390 447 943 2 720 857
The interest rate applied to loans and advances to associates and related parties range from 2.64% to 6.43% in 2013 and from 2.2% to 7.19% in 2012. The collateral the Group received on some loans and advances to related parties consists mainly of unquoted securities.
In 2012 the Group acquired:
(i) to the Group pension funds, 49 779 and 37 115 thousand units of the Fungere Fund and Fungepi Fund, by the amount of euro 158.1 million and euro 87.2 million, respectively;
(i) to ESPART, 50% of the company Greenwoods, 100% of Quinta D. Manuel I and 100% of the company Várzea da Lagoa by the amount of euro 50.7 million;
(iii) to OPWAY, 100% of the company Quinta da Areia and several properties by the amount of euro 43.1 million euros; and
(iv) to Rio Forte Investments, SA, 64 206 units of the Fimes Oriente Fund by the amount of euro 103.3 million.
In November 2012 following the acquisition by Rio Forte Investments, S.A. (Rio Forte) of an additional 19.576 stake in ES Saúde, ESFG and Rio Forte signed a shareholders’ agreement under which Rio Forte assumes control
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
over ES Saüde governing bodies and Rio Forte acquired from ESFG a call option, currently exercisable up to May 2013, over 5.5% of ES Saúde sharecapital plus 1 share, giving Rio Forte the current ability to exercise control over the majority of the voting rights of ES Saüde (See Notes 1, 33 and 55).
In 2013 the Group did not acquire any relevant shareholdings/ assets from related parties.
NOTE 50- SECURITISATION TRANSACTIONS
As at 31 December 2013, the outstanding securitisation transactions performed by the Group were as follows:
Designation Initial date Original amount Currentamount Asseftsecurifised
(in thousands of euro)
Lusitano Mortgages No.1 pk December 2002 1 000 000 329803 Mortgage loans (subsidised regime) Lusitano Mortgages No.2 ple November 2003 1 G00 000 329098 Mortgage loans (subsidised and general regime) Lusitano Mortgages No3 ple November 2004 1200 000 480967 Morigage loans (general regime) Lusitano Mortgages No.4 ple September 2005 1200 000 556 130 Mortgage loans (general regime) Lusitano Mon gages No.5 plc September 2006 1400000 771355 Mortgage loans (general regine) Lusitano SMENo.1 ple October 2006 862 607 176657 ^ Loans to small and nediumentities Lusitano Mortgages No 6 plc July 2007 1100 000 721919 Mortgage loans (general regine) Lusitano Project Finance No.], FTC December 2007 1 079 100 negão ® Project Finance Loans
Lusitano Morigages No.7 ple September 2008 | 900 000 1719046 ` Morlgage loans (general regime) Lusäano Leverage Finance No. 1 BV February 2010 516534 O 52395 Leverage Finance Loans
Lusitano Finance No. 3 November 2011 657 981 289 678 Consumer Loans
IM BES Empresas 1 November 2011 485 000 272068 Loans to small and medium entities
À In March 2011, the credit portfolio associated to this securitisation was partially sold, with (he remaining (domeslic credit) been to "Lusitano Project Finance No.1 ETC”.
©) This securitisation includes ihe amount of euro 382 062 thousand of mortgage loans from BES and an amount of euro 134 472 thousand of mortgage loans from BESI and ES Vénétie
As permitted by IFRS 1, the Group has applied the derecognition requirements of TAS 39 for the transactions entered into after 1 January 2004. Therefore, the assets derecognised until that date, in accordance with the previous accounting policies of the Group, were not restated in the balance sheet.
The assets sold in the securitisation transactions Lusitano Mortgages No.3, Lusitano Mortgages No. 4 and Lusitano Mortgages No. 5, performed after 1 January 2004, were derecognised considering that the Group has transferred substantially all the risks and rewards of ownership.
In accordance with SIC 12, the Group fully consolidates Lusitano SME No. 1 plc, Lusitano Mortgages No. 6, plc, Lusitano Project Finance No. 1 FTC, and Lusitano Mortgages No. 7 plo, as it retains the majority of the risks and rewards associated with the activity of these SPE. Therefore, the respective assets and liabilities are included in the consolidated balance sheet of the Group. The other securitization vehicles are not included in the consolidated financial statements of the Group as it has not retained the majority of the risks and rewards of ownership.
In 2011 there were two securitisation transactions: loans to households (Lusitano Finance No. 3) with loan originated by BES and other of corporate loans (IM BES Empresas 1) with loans originated by BES Spanish branch. During 2010 it was set-up two securitization operations of corporate loans (Lusitano Leverage F inance No. 1) which includes loans from BES London Branch, BESI and ES Vénétie and other of corporate loans and commercial paper
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnis expressed in thousands of euro, except when indicated)
(Lusitano SME No. 2), and the latter been repaid in March 2012. These loans were not derecognised considering that the group has not transferred substantially all the risks and rewards of ownership.
As at 31 December 2013, the Group had also two synthetic securitisation operations underway. In these operations the Group contracted a credit default swap (CDS), with the objective of eliminating the credit risk of a portfolio of loans. The loans related to this portfolio continue to be recognized in the Group balance sheet in the loans and advances to customers caption.
The main characteristics of these transactions, as at 31 December 2013, can be analysed as follows:
Interen held Initin] Farin ga Acto) Kurngs Designates Notes toned Lourd mont Reeg kr Crisp Abee date P —— To (pir ntu) ince) Dé Mes S&P DERS Fid Med S&P DERS {iu thousands of ears) Lasers Mortgeger Nod ple Gana 915600 yu TI Deenber 235 AAA Am AMA - A Baal Aw - Cu xe 32500 December 2035 AA ag AA - A Bat Au, - Chaat 25000 2500 30 December 2013 A A À - A Er] AJ - CsiD 22500 Mu - Deerbar 2015 BBB Bal BBB - Boat Bl Ea - Case 300 3a - December 2013 Ba Fal ER - BB+ Cul B- - Gr In um = December 305 - - - - - - - ` Lusdaco Merlgagea Ne pie Daag A 90 00 2 612 3783 Dearaber NH AAA Au AAA - A Bu AV - Casa Mo» DE 239 December AA An AA - A Ba? Ad - thc 2000 213000 HA) December 2244. A Al A A B ER - Cas O Li coa 15000 4000 December 2248 BBS Bos ERR BaB+ Caal E - Charl 600 $ Wa - December As SRA Pai BH - Ba Ca B- - nF 50x Ba - Decenber 244 - - - - - - - - Lositens Mortgages No J ple Cus 1800 ant 451] December MT AAA Au AMO ț A Bal air. - Chun me 1670 = December HT AA An AA - A BY BRS - Cac 16 nn - December 247 A Al ^ - Pap Cul BE - ES? IO mn = December Muf Bà Pas EBB - BB. ea D - Daat 16:00 bass - December 2047 - - - - - D - - Lusieco Mertgager Na À ple Clana 10400 EI EI ` Dermber 2018 AAA m AM, o ț o Sep. DI Au, - Car B ET 2155 = December 5H AA Ag AA - BEB. m E . Chait ao [LE EI LES] December MH! A+ Al A+ E BA Cal Bt - Curb Mom ne 4905 Deeesitar 2049 PAR Bul BH — ecc Cad D - Cun E 1920 1020 13 ` December HI - - - - - - - Lusiana Mortgager Na ple Casa 1925000 emm 319 December 309 AMA Au AMA Ce BRR ma AJ - CasB 2660 Mat - December 259 AA An AA E Bo Cual Bae - Gut 2240 DÉI - Dener A At A - B Cul B - CussD 2r EIU 559 Decenber MED EBB+ Bu EBB - ec e B- - Class E nex 11500 1700 December 2037 - - - - - - - - Lusitana DES pie Casa, 159323 Aan IM December ME ASA - AM A - am - Gus nmm pr^ O December NO AAA - AAA - AAA - AAA - Canc ao nen - Decenber2018 BB - BH - ar - D - Chin 23005 HYI nui Décesber XM - - - - - E - - Css E 184 inm DD Deecbuoht - - - - - - - - Lusiteno Modgage r Nob pic Chis À 51323) 54213 i118 Mech 306] AAA Ann AAA A Bal Ag CB sns 614 sien Man 2040 AA Ad AA - nna Ba TaB- - CRE ALD m^ 3150 March 2068 A as A Di Di - Cun D nes 1182 Ven Mach 2080 BAB mul BBB B Cad B - at HE 3190) BE Mach 2060 Ba - . occ - cot cour 22800 2100 2106 Mech 206 - - - - - : - : Lusitana Project Fesance No.1 FTC rr mm wan Melo 2021 - - - . - - - . Eusiara Mortgages No? pk Chic A 10550 1235302 1236332 October 2061 - - AAA AAA - - A AAH Case 284 50 284 500 MMO Beete - - BAR- - - - pe . Chss 15 Mb 189 500 1050 October 2063 - . . - : ` Css D EU gu 5:009 October HH - - - - - - - Losana LerengeGonceNolBV Cay A 352000 - + Jeer X9 - - AAA . - . - - Class X nao anm Men Turno - - - - - - - - Cass Sab 206800 110219 DE Danan MN - - - - - - - . Loir Finance N'I usa co) 107713 10723) Neveaber20 - - - - . - - - Clu19 mx XI FOE November 2019 - - a D - - - - Cac 118% 19008 Wa Nornber30 - - - - - - - ` IMBES Empresas À Cun mw TT -O Member - AAA - - - al - - Cas B 212580 Misa Me ` Novensber2013 - Cul - - - Ca - -
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ESPIRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Aiounts expressed in thousands of euro, except when indicated)
NOTE 51- TRANSFER OF ASSETS
As part of the restructuring process of the Portuguese real estate sector, several initiatives have been launched in order to create financial, operational and management conditions to revitalize the sector. Accordingly, the Government, in close liaison with the business and the financial sector (the banks), including the BES Group, encouraged the creation of companies and specialized funds that, through merger, consolidation and integrated management, would obtain the required synergies to recover the sector, Pursuing the goals established, were created companies (parent companies), where BES Group has minority interests (in partnership with other banks that also have a minority interest), and which in turn now hold almost all of the capital of certain subsidiaries (subsidiaries of those parent companies) in order to acquire certain real estate bank loans.
During 2013 and 2012, BES transferred financial assets (mainly corporate loans) to the subsidiaries of the parent companies. These entities are responsible for managing the assets received as collateral, which after the transfer of loans are received in exchange for the loans, and have the goal to implement a plan to increase its value. Almost all of the financial assets transferred in these operations were derecognised from the balance sheet of the Group, since a substantial portion of the risks and rewards associated with these, as well as the respective control, were transferred to those third parties.
These acquiring entities (the subsidiaries of the parent companies) have a specific management structure, fully autonomous from the banks, selected on the date of their incorporation and have the following main responsibilities:
* define the entity's purpose; * administer and manage on an exclusive and independent way the assets acquired, determine objectives and investment policy and the manner to conduct the entity's management and affairs.
The acquiring entities are predominantly financed through the issuance of senior equity instruments fully underwritten by the parent company. The amount of capital represented by senior securities equals the fair value of the underlying asset, determined through a negotiation process based on valuations made by both parties, These securities are remunerated at an interest rate that reflects the risk of the company holding the assets. Additionally, the funding can be supplemented through banks underwriting of junior capital instruments equal to the difference between the book value of the loans transferred and the fair value based on the senior securities valuation. These junior instruments, when signed by BES Group will be entitled to a contingent positive amount if the assets transferred value, when sold, exceeds the amount of senior securities plus its remuneration. Normally, the amount of the junior security is limited to a maximum of 25% of the total amount resulting from the senior and junior securities issued.
Given that these junior securities reflect a different assessment of the assets transferred fair value, based on valuation perforined by independent bodies and a negotiation process between the parties, they are fully provided for in the Group's balance sheet.
Therefore, following transfer of assets occurred in 2012 the Group subscribed:
* cquity instruments, representing the parent companies’ share capital on which the cash flows that will enable its recovery come from a wide range of assets transferred by the various banks. These securities are recorded under financial assets available for sale and are measured at market value with valuation regularly reported by those parent companies whose accounts are audited at the end of each year;
e junior instruments issued by the acquiring companies (the subsidiaries of the parent companies), which are fully provided for thus reflecting the best impairment estimation of the financiat assets transferred,
The instruments subscribed by BES Group clearly resulted in a minority position in the capital of the parent companies and of its subsidiaries.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
In this context, having no control but being exposed to some risk and rewards of ownership in relation to the transferred assets through the securities subscribed as referred to above, the Group, in accordance with IAS 39.21, conducted an analysis in order to compare the exposure to the variability of risks and rewards of the transferred assets before and after the operation and concluded that it has not retained substantially all the risks and rewards of ownership. Additionally, and considering that also no control has been retained, it proceeded in accordance with TAS 39.20c (i) to the derecognition of the assets transferred and the recognition of the assets received in return, as shown in the following table:
Amounts aL transfer date
Amount ofthe assets transferred Securilies subscnbed Nel assels Trans(er Resull of the Shares Junior ` - a We Taral inpaimeal Net amount transfered amount transfer (senior securities) securilies (in thousands of eurc) Jn 2083 Fundo Recuperação Turismo, FCR. 282121 282 121 - 256 892 34906 291 798 (4 908) 256 #92 ELEC SICAV 252866 254 547 1681 235318 23247 258 565 232479 235318 Discovery Portugal Real Estale Fund oe 196 21208 (2988) 96733 - % 733 - 96 733 Fundo Vallis Construction Sector 65272 65272 - 31002 21992 102.904 (21 992) $1002 Fundo Recuperação, FCR. 145 564 149 883 4319 14$ 787 36 182 184 569 (23000) 161 969 In 2083 Fundo Vallis Construction Sector 18 552 18552 - 1606 2874 4480 (2874) 1606 FUT SICAV 82 769 80 135 (634) 85360 - 25360 - 85360 Discovery Portugal Real Estate Fund 51 809 45 387 {6 422) 51955 - 51955 H 51955 Fundo Recuperação Turismo, FCR. 11 056 11 086 - - . - - - Fundo Recuperação, FCR. 52981 52963 (20) 726 - 726 H 726 Fundo Reestruturação Empresarial 67836 6j 836 - 90403 99 403 D 99 40)
1126 034 1121970 (4 064) 1057 782 119 201 1176 983 (106 019) 10705964
As at 31 December 2013, the Group's total exposure in operations related to transfer of loans/assets amounted to euro 1 135.6 billion (euro 984.7 million, net of impairment).
As showed in the table above, the junior securities underwritten specifically as part of the transfer of assets are fully provided for. Although the junior securities are fully provided for, the Group also maintains an indirect exposure to the assets transferred through its minority interest in the parent companies capital and therefore, in all pool of assets that resulted from the various assets transfers performed by the banks (shareholders of the parent companies).
There was however an operation with the company FLITPTREL VIII in which, as the acquiring company substantially holds assets transferred by BES Group and considering the holding of junior securities, the variability test resulted in a substantial exposure to ali risks and rewards. In this circumstance, the operation, amounting to euro 60 million, remained recognized in the Group's balance sheet under Loans and advances to customers.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTES2- FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The fair value of financial assets and liabilities, for the Group, is analysed as follows:
Fair Value
Valuation models Valuation models
Amartised Cast QuotedMarket ee pus Sieg Book Value Fair Value Prices markel markei information Information (in thousands of euro) Balance as at31 December 2013 Cash and deposits al central banks 18286 - - - 1 828 674 1828674 Deposits with banks 11893 - - - 1 48934 1148534 Financial assets held foz trading - +073 726 1412051 2688 2 483 465 2488465 Securilics Bonds issued by government and public entities - 955951 . - 955 951 955951 Bonds issued by other etitles - 83283 17413 2583 105279 105279 Shares - 30894 69 « 30963 30963 Other variable income securities - 1596 - 105 1701 1701 Derivalives Exchange raie contracts H - 69 990 - 60950 60990 Interest rate contracis - . 1231085 . 1231045 1231045 Credit default contracis - - Ho . HHO 34210 Others . - 58606 - 58 656 58696 ther [mancial assets at fair valve through profs orloss - 2349139 742242 472231 3564 EB 3564118 Bonds issued by government and public entities - 1234 817 - - 1234 847 1234817 Bonds issued by other etities - 491909 70182] 33647 1229 467 1229 467 Shares and other variable incame securities H 620203 4042! 433009 1002 804 1099 804 Available-for-sale financial asscls 6517 0 5142754 2435703 1344774 2929 778 8929778 Bonds issued by government and public entities - 2900 469 1139328 E 4099 797 i099 797 Bonds issued by other etities - 932457 1191508 12717 2238742 2238712 Shares 6547 mi 31885 42579 583 701 11:712 1179712 Other variable income seeuritles . 707 943 60258 643356 1411557 1411557 Loans and advances to banks 4827 790 . - . 4 827 790 1817790 Loans and advances to cuslomers 486838H . 536823 - 49 270 667 36511627 Held-to-alurity nvesimenis 1672068 - - - 1622 068 1631217 Bands Issued by government and public entities 437 778 - - - 43278 437364 Bonds issued by ather esities 1234220 - - - 1234290 1196853 Derivaltves [orr&k management purposes - - 363391 H 363391 363391 Exchange rate contracts - - 126 - 1726 1726 Interest rate contracts - - 317132 - 317132 317132 Credit default contracts - - 25 188 - 25 188 25 188 Others E - 19345 - 19345 19:45 Financial assets 58 167857 8565617 5540212 1820199 74 093885 71332995 —— — Deposits from central banks 977224 - - H 9772244 9722 Financial liabifties held for trading . 7262 1329506 - 1335764 1336 768 Derivalives Exchange rate contracts - a 50333 - 50333 50333 Interest rate eoniraets - - 1052355 - 1097335 1097335 Credit default cantracis . - 13387 - 18387 18347 Chers H - 156229 - 156229 156229 Other financial babies held for trading - 7262 7222 . 14 484 14481 Deposits from banks 4809385 H 224 109 H 503343 4971 149 Due to cusloners 28647635 - 9456172 H 38 093 807 38093807 Debe securities issued 9364 858 - 3246310 - 12615208 15051812 Derivatives for rsk management purposes a - 130710 - 139710 130710 Exchange rate contracts - . 1501 . 1501 1501 Interest rate contraets - H 79667 - 7) 667 79667 Credit default contracts - - 19949 - 10949 10949 Others . - 38593 - 38593 33593 Investment contracls 2804498 - 1669423 E 4473921 3342051 Subordinated debt 1402915 H 273 D 1403 188 1441582 Financial liabilities 56805575 7162 16046 503 - 72859 340 74 195 146
O assets Bl acquisition cost net of impairment losses These assets refer Lo equity insirumentaisuied by non-quoted eal i jes in relation to sich no recent Lrenzsci ions were Mealified pr is net possible to estimate reliably ils [nir value,
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Fair Value Valuation models ` Valuation models Amortised Cost Quoted Market basedon based on sen. Hook Value Fair Value a otservable olservalle Prices market markei Informailon information
Gn thonsands of euro)
Balance as al 31 December 2012
Cash and deposäs al central banks 14H 831 - - - 144831 14581 Deposits with banks 106853 - . - 1126853 1126853 Financial assets held for trading - 1490 879 2490966 - 3981 815 3981 845 Securities Bonds issued by government and public entitles - 1349507 46076 E 1395383 1395583 Bonds Issued by other etities H 98686 166311 - 265057 265057 Shares - 40 505 11776 - 52381 52281 Other variable income securities . CH - - 2181 2181 Derivalives Exchange rate contracts - - 76 786 - 76786 TE 786 Interest rate contracts « - 1997525 . 1997925 1997925 Credit default contracis - ~ AG - H913 41913 Others . - 147 L19 - 147109 147 119 Orher fmancial assets at far watoe through profit or loss - 1324283 2767 281507 26046 280463 Bonds issued hy government and public eniities - 516 859 - - 516 859 516 859 Bands issued by other etities - 210924 662 065 4732 356370 956 370 Shares and other variable income securities . 566 440 329 608 TH 186 11302. 150231 Available-for-sale financial assets Zen o 5367885 4706 (52 959 693 11041235 1 041235 Bonds issued by government and publie entines - 3204 546 1293451 - 449797 4497997 Bonds Issued by other etities H 998414 3208 240 19297 1225951 4225951 Shares Ren 0 783266 74595 508 688 1380 154 1380154 Other variable income securities a 376659 128 766 11178 937 133 937133 Loans and advances to banks 4548247 . - - 4548217 35418217 Loans and adyances to cuslomers 50 190 516 - 542362 - 50692878 47670603 Held-to-maturity mvestmenls 1112047 - ` - Lng 047 1069283 Bonds issued by government and publie entiites 404 393 - - - 401393 423863 Bords issued by other etitles 711654 H E - 714654 615421 Denvalives forsk management purposes - - 516520 H 516520 516520 Exchange rate contracis H . 5356 - 5356 3356 Interest rare contracts - - 460692 - 460 692 460692 Credit default contracts E - 10216 . 10216 19216 Others - H 40256 - 40256 40256 Financial assets 54 428 099 8 183 047 9222573 1241200 11074919 74 002885 ms — Deposils [romcenlral banks 10941325 - - - 1994] 325 19941 325 Financial habiities held for trading - 7% 21342 - 2124 225 24225 Derivaltves - - . RN - - Exchange rate contracts H - 89 101 H #9 10t 80101 Interest rate contracis - - 1855768 - 1855768 1855768 Credit default contracts - - 31473 - 31478 31478 Others - - 156 082 - 156032 I56 082 Osher Gnancial Babies held for trading - Ba - - 7% 7% Deposits frem banks 4453703 H 612277 - 5 065 980 4875 828 Due to customers 26 828 492 - 8 796 982 E 35615474 35625474 Debl securities issued 13293 288 - 2659582 - 155352870 16426268 Derivatives for risk management purposes - - 125 199 - 125 159 125 199 Exchange rate contracis - - 232 - 232 232 Interest rale contracts - - 65437 . 65437 65437 Credit default contracts H . 18350 - 18340 14340 Others - . AL 190 - 4l 190 41190 InveslmenLcontmels 1729 390 - 2114630 - 3344020 4045 862 Subord mated debi 1176219 - 263 E 1176482 1180 958 Financial liatzlities 58 422417 796 16 432362 - 74855575 75345139 em —
©) Asch al acquisition cost nel of impaisment loses These assels refer (o equity insi rumenls issued by noa-queted entities in relation lo which po recent transsclions were Meel ified or is nol possible Lo estimate relsbly ifs [ax vafe.
The Group determines the fair value of its financial assets and liabilities in accordance with the following hierarchy: Quoted market prices (level 1) — this category includes financial assets with available quoted market prices in
official markets and with dealer prices quotations provided by entities that usually provide transaction prices for these assets/liabilitics traded in active markets.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonuts expressed in thousands of euro, except when indicated)
Valuation models based on observable market information (level 2) — consists on the use of internal valuation techniques, namely discounted cash flow models and option pricing models which imply the use of estimates and require judgments that vary in accordance with the complexity of the financial instrument. Notwithstanding, the Group uses observable market data such as interest rate curves, credit spreads, volatility and market indexes.
Includes also instruments with dealer price quotations but which are not traded in active markets.
Valuation models based on non-observable market information (level 3) — consists on the use of internal valuation techniques, mainly discounted cash flow models, or quotations provided by third parties but which imply
the use of non-observable market information.
The movements of the financial assets valued based on non-observable market information, during 2013 and 2012,
can be analysed as follows:
Financial assets held for
trading
Balance as at i January -
Acquisitions 25 660 Disposals - Transfer (22 772) Changes in value (200) Balance as at 31 December 2688
Financial assets held for
trading
Balance as at 1 January - Acquisitions - Disposals - Transfer - Changes in value -
Balance as at31 December -
31.12.2013
Other financial assets at fair value through profit or loss
(in ihousands of euro)
281 507 36 008 (4 797) 205 748 4271
472 737
31.12.2012
Other financial assets al fair value through profit or loss
(in thousands of euro)
14332 215 819 Q 722)
(5922)
241 507
e
Available-for-sale financial assets
959 693 360 250 {56 082) 117021 (36 108)
1344774
Sem — — — c—
Available-for-sale financial assets
253 507 713 523 (17 604) 6593 3674
959 693
The main assumptions and inputs used in the valuation models are presented as follows:
Interest rates curves
Total
1241 200 421 918 (110 879) 299 997 (32.037)
1820195
Total
267 839 929 342 (20 326) 6593 (2248)
1241200
m
The short term rates presented reflect benchmark interest rates for the money market, being that for the long term the presented values represent the swap interest rate for the respective years:
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Ainounts expressed in thousands of euro, except when indicated)
31.12,2013 31.12.2012
EUR USD GBP EUR USD GBP Cé Overnight 0.1100 0.1100 0.4100 0.0700 0.1000 0.4700 1 month 0.1941 0.1600 0.4100 0.1759 0.2300 0.4600 3months 0.2870 0.3300 0.5200 0.1870 0.4150 0.4800 6 months 0.3890 0.4100 0.7350 0.3200 0.4400 0.6200 9 months 0.3981 0.4509 0.8100 0.3178 0.5900 0.7900 1 year 0.4130 0.3050 0.6412 0.3200 0.3260 0.5411 3 years 0.7715 0.8560 1.4342 0.4700 0.4765 0.7783 5 years 1.2580 1.7490 2.1337 0.7650 0,8260 1.0169 7 years 1.6820 24270 2.5170 1.1250 1.2435 13563 10 years 2.1550 3.0280 2.9876 1.5700 1.7500 1.8560 15 years 2.5809 3.5230 3.3160 2.0184 2.2800 24135 29 years 2.7139 3.7200 34170 2.1715 2.5020 2.7230 25 years 2.7399 3.8080 3,4380 22203 2.6240 2.8800 30 years 2.7309 3,8520 3.4360 22413 2,6880 29535
Credit spreads
The credit spreads used by the Group on the valuation of the credit derivatives are disclosed on a daily basis by Markit representing observations constituted for around 85 renowned international financial entities. The evolution of the main indexes, understood as being representative of the credit spreads behaviour in the market throughout the year, is presented as follows:
Index Series 1 year 3 years 5 years Tyears 10 years (basis points)
Year 2013
CDX USD Main 21 7.67 29.88 62.44 88.95 107.99 iTraxx Eur Main 20 - 35.17 70.15 96,97 118.17 iTraxx Eur Senior Financial 20 - - 87.06 “ 135.18 Year 2012
CDX USD Main 19 33.02 $8.73 95.39 118.68 136.14 iTraxx Eur Main 18 - 76.38 117.43 141.58 154.60 iTraxx Eur Senior Financial 18 - - 142,44 - 174.98
Interest rates volatility
The values presented below, refer to the implied volatilities (at the money) used for the valuation of the interest rate options:
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
31.12.2013 31.12.2012 EUR USD GBP EUR LSD GBP (26)
l year 112.77 75.90 49,18 197.18 66.60 54.10 3 years 65.30 72.76 55.78 84.70 72,90 64.90 5 years 53.30 50.62 45.99 67.50 63.22 60.80 7 years 45.20 3821 38,55 52.90 51.03 49.60 10 years 36.80 31.55 31.80 39.70 42,33 37.20 15 years 30.68 35.58 20.58 31.43 35.80 27,80
Exchange rates aud volatility
Presented below are the exchange rates (European Central bank) at the balance sheet date and the implied volatilities (at the money) for the main currencies used on the derivatives valuation: Volatility (9o ) Exchange
Rates 31.12.2013 31.12.2012 1 month 3 months 6 months 9 months 12 mouths EUR/USD 1.3791 1.3194 7.65 7.75 7.88 8.15 8.32 EUR/GBP 0.8337 0.8161 6.55 6.73 7.00 7.13 7.33 EUR/CHF 1.2276 1.2072 3.25 3.83 4.23 4.58 4.89 EUR/NOK 8.3630 7.3483 8.05 8.03 7.95 8.00 7.98 EUR/PLN 4.1543 4.0740 5.00 5.84 6.56 7.08 7.53 EUR/RUB 45.3246 40.3295 7.37 7.89 8.43 8.90 9.41 USD/BRL 23621 2.0491 12,95 13.38 I3.60 13.80 14.00 USD/TRY ? 2.1467 1.7850 14.50 13.80 13.60 13.60 13,60
G Calculation based in EUR/USD and EUR/BRL exchange rates
® Calculation based in EUR/USD and EUR/TRY exchange rates
Concerning the exchange rates, the Group uses in the valuation models the spot rate observed in the market at the time of the valuation.
Equity indexes
In the table below, is presented the evolution of the main market equity indexes and the respective volatilities used for the valuation of equity derivatives:
Quote Historical volatility Implied 31.12.2013 31.12.2012 % change 1 month 3 months volatility
DJ Euro Stoxx 50 3 109 2 636 17.95 14.90 13.72 1344 PSI 20 6 559 5655 15.98 12.91 13.65 - IBEX 35 9917 8 168 21.42 15.39 15.34 - FTSE 100 6 749 5 898 14,43 10.11 9.83 10.69 DAX 9552 7612 2548 13.23 12.04 13.56 S&P 500 1848 1426 29.60 8.74 10.31 11.21 BOVESPA 51 507 60 952 (15.50) 19.34 20,22 -
F-147
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The valuation adjustments which the Group has considered in the valuattons of its derivatives and borrowings, were (i) credit value adjustments (CVA), reflecting the counterparties credit risk embedded in the fair value of derivatives, (ii) debit value adjustments (DVA), reflecting the Group's own credit risk embedded in the fair value of derivatives and own credit adjustments (OCA), reflecting the Group's own credit risk embedded in the fair value of non-quoted borrowings.
CVA per counterparty is calculated on the exposure per net counterparty exposure, to which is applied the probability of default (PD) of the counterparty and the loss given default.
OCA is calculated using market observable CDS spreads, namely BES CDS spreads.
The methods and assumptions used in estimating the fair values of financial assets and liabilities measured at amortised cost in the balance sheet are analysed as follows:
Fair Value Valuation models — Valuation models Amortised Cost Quoted Market based on based on non- Fair valne Pri observable observable ‘es markel market informalion information Level 1 Lewl2 Level 3 (in thousands of eura)
Balance ns al 34 December 2013 Cash and deposits at central banks 1828674 1923674 - - 1 828 674 Deposits with banks 1148934 1148534 - - 1 148 934 Available-for-sale financial assets shares 6517 - - 6547 6547 Loans and advances to banks 4827 790 - 4 827 790 - 4827 0 Loans and advances 1o customers 48 683 844 - 45 960 805 - 45 960 805 Held-lo-relurity investments 1672068 640 871 991 479 1 468 1634218
Bonds issued by government and public entities 437718 434 900 2464 - 4373601
Bonds issued by other etities 1234290 205971 989 415 1468 1196354 Financial assets 53167 857 3618 475 51 780 474 8015 55 406 968
ee
Deposits fromcentralbanks 977224 9772 244 - - 9 712244 Deposits from banks 4 800 385 - 4747 040 - 4 747 40 Due to customers 28 647 635 - 28 647 635 ` 28 647 635 Debl securities issued 9368 898 6239 703 5 254 682 234132 11818 522 Investment contracts 2304 498 - E 712631 - 1726 Subordinated debt 1402 915 1200546 242363 - 1 443 309 Financial liabilities 56305 575 17262 898 40 644 351 234132 58 141 381
Cash and deposits at central banks, Deposits with banks and Loans and advances to banks
Considering the short terin nature of these financial instruments, carrying value is a reasonable estimate of its fair value.
Loans and advances to customers
The fair value of loans and advances to customers is estimated based on the discount of the expected future cash flows of capital and interest, assuming that the installments are paid on the dates that have been contractually defined. The expected future cash flows of loans with similar credit risk characteristics are estimated collectively. The discount rates used by the Group are current interest rates used in loans with similar characteristics.
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ESPÍRITO SANTO FINANCIAL GROUP $.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
Held-to-maturity investments
The fair values of these financial instruments are based on quoted market prices, when available. For unquoted securities the fair value is estimated by discounting the expected future cash-flows,
Deposits from central banks and Deposits from banks
Considering the short term nature of these financial instruments, carrying value is a reasonable estimate of its fair value.
Due to customers
The fair value of these financial instruments is estimated based on the discount of the expected future cash flows of capital and interest, assuming that the instalments are paid on the dates that have been contractually defined. The discount rates used by the Group are the current interest rates used in instruments with similar characteristics. Considering that the applicable interest rates to these instruments are floating interest rates and that the period to maturity is substantially less than one year, the difference between fair value and book value is not significant.
Debt securities issued and Subordinated debt
The fair value of these instruments is based on market prices, when available. When not available, the Group estimates its fair value by discounting the expected future cash-flows.
NOTE 53- RISK MANAGEMENT
A qualitative outlook of the risk management at the Group is presented below:
Credit risk
Credit risk represents the potential financial loss arising from the failure of a borrower or counterparty to honour its contractual obligation. Credit risk is essentially present in traditional banking products — loans, guarantees granted and contingent liabilities — and in trading products — swaps, forwards and options (counterparty risk). Regarding credit default swaps, the net exposure between selling and buying positions in relation to each reference entity, is also considered as credit risk to the Group. The credit default swaps are accounted for at fair value in accordance with the accounting policy described in Note 2.4.
Credit portfolio management is an ongoing process that requires the interaction. between the various teams responsible for the risk management during the consecutive stages of the credit process. This approach is complemented by the continuous introduction of improvements in the methodologies, in the risk assessment and control tools, as well as in procedures and decision processes.
The risk profile of ESFG Group's credit portfolios is analysed on a regular basis by the risk committees at the subsidiary level. In these meetings the Committees monitor and analyses the risk profile of the Group entities under four major perspectives: evolution of credit exposures, monitoring of credit losses, capital allocation and consumption and control of risk adjusted return.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
ESFG Group credit risk exposure is analysed as follows:
31.12.2013 31.12.2012
(in thousands of euro)
Deposits with banks 3577359 3 433 052 Financial assets held for trading 2 455 801 3 927 384 Financial assets at fair value through profit or loss 2 464 314 1 473 229 Available-for-sale financial assets 6 338 509 8 723 948 Loans and advances to customers 49 270 667 50 692 878 Held-to-maturity investments 1 672 068 1119047 Derivatives for risk management purposes 363 391 516 520 Other assets 729 168 605 374 Guarantees granted and stand by letters of credit 8031 816 8 427 956 Open documentary credits 4234 660 3 780 554 Inevocable commitments I 800 185 3 461 701 Credit risk linked to the reference entities of credit derivatives 176 305 489 884
81 114 243 86 651 527
The analysis of the risk exposure by sector of activity, as at 31 December 2013 and 2012, can be analysed as follows:
31.122013 Loans ind advances to customers ` Geschl uge Olhe finança d Axadablefor-sskc Enencistasseis Helo mm tord inves nuts Financia! z —MMM—MM—M——— ————————— jarantees Cross buet held for trading vale hough Gross men Gross NEN sa Si amount proa ot bn amount Tnpanment buses mn make psies {n thousands ofeuro} Ageculture KKK) (2357) 85% - 7017 - - - 36054 Mining 25661 (077) 1083 5115 13392 (TD - - 41055 Food, beverage end tobacco: 107766 (4545 26605. 42396 n7m (52 4521 - 70500 Testes 37) 54 (33915) KH H WTR (3557) - - 15329 Shoes 75046 (6607 205 - 499 (453) - H 155 Wood and cork 139638 (22581) 3n me 15528 (1329) H . KC Printing and pobishing 396424 (5 42) 158) - 35811 (10035 - - 59427 Refining and oi 3007 (UD 2H 2225 93043 (12227 - - 541 Chemice’s and rubber 614 859 (16951) 9115 25062 3731 (13 45 H . 95966 "Nonaretafe minerals 317314 (30156) HH H 12710 (TS - - 21156 MetnEc products 560 765 (71576) ES? 323 366 (52 - - 193496 Produelion of mechinery, equipment and ekelri devices 233680 (10515 1264 257 12645 (3582) - - HOI Production of trans port material 3633 (6238) 51 36011 39 206 (108) - - 71155 ‘Other lransfonrmg industries 48708? (3205) 76 1424 48823 (15515) H H 41268 Beie ts, gas and water 1352949 (n8 124436 28602 305684 (325) - - 512944 Construction 4385193 (4 685) AS NO 133 546 294 RIO (3385 3545 - 2219758 Who sale and rela 3380556. (3XrTi6) 8331 73192 65949 (21619) 335 H 507631 Toursm 14404 (121220) 5708 17912 2n (5325 - - 135140 Trans porta acd commun eatipas 2171418 coro 184 269 Kl 259894. (568) 15841 - TAKE Fnencisteclviies 4602 509 (221119) 6561842 1492033 2575583 (117749) 1076 580 (8808) 28005 Realestate activities S627 216 (616 989) 17675 125 439 12155 (Alm) 1X4 - 365 482 Services provided lo companies 5098084 (459151) 28639 ET n55n (190 sam - 1342690 Pubie senes 1594 188 (25454) $60 423 12488407 4055708. (1923) 4TH - [96 168 Nonprofit ocgensalons 3459281 (BS 677 210 56 ES 3938E1 (47602) THA (4617 463271 Mongage bans 10814 726 (18585) - - 49? - - - 6 Consumer bang 2541855 (208 835) - - Zei - - - 23292683 Ober 7531 (10178) 5n KO 743 (3357 - - 4555 TOTAL 52716747 (46075) 2488 465 35564118 9247823 (318044) 1685 489 (13-421) Sasi 916 —— — — —MMÀ —— — MM — m ama MÀ
F-150
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnis expressed in thousands of euro, except when indicated)
31122012 Loans and advances to Customers . Ouerhnansal ` A aspe Foi eile inanci] assels Held to rruteriy investments Financial Financial assets assels as at far ——————— tees Gross keent losses hel fortrading value through Gross . " Gross ` E issued amounl profitor los amount Erparment bsses event koparen? bosses (n ibousanda of euro) Agreotnre 435485 (22132) 1420 - 10725 (6 - - 3667 Minng 30122 (ams) IH? ns 12969 (675 - H 3655 Food, beverage and tobacco 1025 563 (50542) 25727 2685 10560 (52 - - 103 345 Texies 332206 (Uns 862 - 10425 (3:58) H - 14833 Shoes 63352 (6345) Ki - 499 (49) - - 2063 Wood and eoi 11745 (BN 48 2236 4366 (1330) - - 7466 Printing and publishing 31 8859 (5601) 6683 - 11968 CLS) - - GE Refining end ol 6976 (45 4817 3385 21933 (nu) H H 3425 Chemicals and rubber 616 399 (HHH NA In 209 (13225) D - 102 280 Nonsretaho meas MIHI (28435 431 - 13 103 (798 - . 215 Mets products 9612 (0197) 14 592 194 24 - ” H 156525 Producta of mchmer, equipment und electric deves 2116 Que 307 581 31242 (57) 1525 - 120022 Production of transpor neleral ntes (9675 630 105 35229 Qus - - 3682 Oher trans forming industrica 389355 (21340) Leit 2555 54090. (11230) - - 38449 Ekeuxiy, gus and waler 1475 462 (110) 155 360 35712 708 231 - 4243 H 527 60 Construction 5337653 (381821) 416606 5503 T1858 (16885 - - 2450083 Whoksale end raai 320510 (#0015) 1810 1366 35267 (1543 1537 - 577 «o Toursm 1453363 (91 596) 15324 65301 39674 {45 - - 121 895 Transports and communications 2163930 (TM 21250 18593 KKK? (9389) 20945 - 1032219 Finareal selivites 4691491 (123507) 1052978 1690 3691898 (11415 578 140 (20724) 2533115 Real estale activées 6211526 CAM GI) 5237 70000 201741 (18D 12:9 - 456 3 Services provided to companies 4959436 (37558) 315261 921424 1 138903 (33197 39139 - 1501039 Public saves 551941 (21939) 1408 962 516859 4459007 (0990 404 391 H 2718 Non-profd organisations 34321397 (268 521) 133213 26331 360 680 (46083) 106 997 (18317) 402493 Mortgage bans 1113382 (169 114) - - - - - ` 9 Consumer bans 2TE 244 (02485 xo - H - - - VM Caber MAb 252 (uno 186 1963 11781 (95 H - 1n78 TOTAL 53427 504 (1734626) 3981545 2603463 1555375 (254 141) 1158158 (38111) 6427956 —— — — — ———
F-151
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
{Amounts expressed in thousands of euro, except when indicated)
As at 31 December 2013 and 2012, the analysis of the loan portfolio by rating is as follows:
Credit amount (In militon of euro)
3.63%
Rating/Scoring models "mer Credit IMS (in million of euro) [aaa;a-] 8 [bbb+;-bbb-] 2119 Large companies [bb+;bb-] 4549 [b+b-) 7074 cect 1981 89 488 10-11 403 12-13 553 14-15 467 Medium enterprises 16-17 502 18-19 380 20-21 468 22-23 231 24-25 1527 A 62 B 334 C 556 Small enterprises D 26 E 137 F 556 o! 1220 02 4398 03 1427 H 680 Mortgage loans " 506 06 496 07 617 08 712 o 74 H 57 eo 18 H 238 05 [18 Privale individuals 06 170 07 149 08 132 0 183 10 2 No intemal rating / scoring loans T8 757
TOTAL ESFG 52717
© Internal scale established by the Group. The lower Ihe number / letter lhe better is the rating
F-152
35.59%
100.00%
31.12.2012 Ce)
H 0.01% 2313 433% 4997 935% 8080 15.12% 1277 239%
535 100% 532 100% 632 1.18% 438 0.82% 567 1.06% 342 0.6495 347 0.65% 2% 0.55% 1659 3.11% 71 0.13% 305 0.57% 620 1.16% 311 0.58% 251 0.4795 557 LH% 11% 2.24% 4341 812% 1492 27995 Hu 133% 503 0.9495 488 091% 679 127% 953 178% 86 0.1626 66 0.12% 130 024% 312 0.58% 136 025% 198 037% 144 027% 109 020% 260 049% 4 001% 17485 32.77% 33 428 100.00%
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Ainounts expressed in thousands of euro, except when indicated)
Market Risk Market risk is the possible loss resulting from an adverse change in the value of a financial instrument due to fluctuations in interest rates, foreign exchange rates or share prices, commodities prices, volatility and credit spread.
The market risk management is integrated with the balance sheet management through the Asset and Liability Committee (ALCO) at the Group entities level. These committees are responsible for defining policies for the structuring and composition of the balance sheet, and for the control of exposures to interest rate, foreign exchange and liquidity risk.
The main measure of market risk is the assessment of potential losses under adverse market conditions, for which the Value at Risk (VaR) valuation criteria is used. Group's VaR model uses the Monte Carlo simulation, based on a confidence level of 9996 and an investment period of 10 days. Volatilities and correlations are historical, based on an observation period of one year. As a complement to VaR, stress testing has been developed, allowing to evaluate the impact of potential losses higher than the ones considered by VaR.
31.12.2013 31.122012
December Annual average Maximum Minimum December Annual average Maximum Minimum
(in milllon of euro)
Exchange risk H 166 9192 10957 7371 3399 11272 13723 3399 Interest rate risk 5532 7108 +342 5566 8793 18 426 28 532 8793 Shares & Commodity 11186 12619 21441 10538 15026 14 439 11 127 15026 Volatdity 3055 5817 4089 2857 712 7222 7113 7112 Credit Spread 16775 23944 33 893 1694I 13887 46212 71556 13 887 Diversification effect (10901) (110) (I4 773) (8725) (10105) (17 020) (20347) (10105)
36413 47 678 64 949 34 548 38112 74541 111 764 38112
Group has a VaR of euro 36 813 million (31 December 2012: euro 38 112 million), for its trading positions.
Interest rate risk
Following the recommendations of Basel T (Pilar 2) and Instructions n.19/2005, of the Bank of Portugal, ESFG Group calculates its exposure to interest rate risk based on the methodology of the Bank of International Settlement (BIS), which requires the classification of non-trading balances and off-balance positions by repricing intervals.
31.138015 313222212 Tlegitte Nom Die? Ate Dm Mereus ` Pio, | Uptas 365 Sisi? « ‘More thin 5 amos easke ado mua mans SR ` zem ents 07735 88 ag mah) mads IHS ` uu fia ihounsado of euro) Qa thoatundy ef caro)
Cash jid deposit 1n 3300 TUTO Pon? EM 337 Le 7126 ER A318 6112706 Xn 101378 1223 436 Loans and advances lo customers mm - 334584 oun "eum een "oun VWN - mm om mu aam ANDAR Teide IO aoo AMM 1181617 Inu 1062751 2145279 17659 185 ELE? 389251 1909592 165147 1013169) LX 36 Total . 413132211 9722670 1913653 TEM SIS 5334313 4054141 114731 5H 3898057 8551231 4014 1st Deposits from banis TIT) - qu mm om wm unm ` Dn um un HD MM MW Dos 16 customers y 5231: - MES lts 1140% 6711979 332A M2 33 Min - HEHEG 1959 078 305513) 57H10 gu Debt recurtties iiyced and rubordmates den uid - 21533355 190r» HZH 1759313 332319 16023167 - 327680 49760] 191% 5558514 31248 Preference nhares qan - - - - - nu sot - - - - EES Toul 34728515 4520188 7716777 1424304 S105610 mn — 4032 niert Daten 1AM GAP. Ase linbaies e ad 045) TSILSIP 3291882 Drog GMOs aM) — 1686502 (E310) 7613145 (MAD Gan — (01404) Of Balance sheet ama om oun man (24) gmap — Qum OMS ENIH 6505 Steactoral GAP Greg Gaay — enn vumm (MIND (ANT — Lean Gren ou ` vm 23864 ` (593) Accum Tiled GAP Gemy — 104830 — 23999 GA) (ANG) Quia) Gong AUD (eum ABS
F-153
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 341 DECEMBER 2013 AND 2012 — (Continued) {(Amotmts expressed in thousands of euro, except when indicated)
The sensitivity of ESFG Group to interest rate risk, measured in accordance with Instruction no. 19/2005 of the Bank of Portugal, which requires the calculation of the impact of a parallel shift of 200 basis points in the interest rate curve, can be analysed as follows:
31.12.2013 31.12.2012 (in million of euro)
Accumulated impact in equity: Increase of 200 basis points (96) (65) Decrease of 200 basis points 96 65
In addition, the model used to monitor the sensitivity of BES Group to interest rate risk is based on the duration model, and consider parallel and non parallel scenarios.
31.122013 31.12.2012 . Parallel Parallel Increase ofS0 = Decreaseof50 — Parallel Parallel Increase of 50 Decrease of 50 increase of 100 decrease of bpafter 1 year bpalter 1 year increase of 100 decrease of bpañter 1 year bpañer I year bp 100bp y ye bo 100bp y y (in milton of euros)
À131 December (22) 22 (n 1 ( 85) 85 (3) 4 Average for lhe year (80) RO (24 24 (2) 22 (H 1 Maximum forthe year ( 110) no (33) 38 € 125) 125 e { 60) Minimum for lhe year (71) 7 (20) 21 13 (13) 22 (22)
The following table presents the average balances, interest and interest rates in relation to the Group's major assets and liabilities categories, for the years ended 31 December 2013 and 2012.
31.12,2013 31.12.2012 Average balance Interest of the. Average inlerest Average balance Interestof the Average Interest of the year year rate of (he year year rate
(in thousands of euro}
Monelary assets 9833 442 269 980 275% 8949 524 196 774 220% Loans and advances to customers 103 634 293 2445378 235% 104 771 572 2 683 469 2.56% Securities 28 725 539 704748 245% 29042 776 865614 2586 Financial assets 142 193 274 3420 106 241% 142 763 872 3 746 857 2,6295 Monetary liabilities 30 970 140 342599 LISS 35 504 430 422 556 1.19% Due to costumers 74 431 667 1020 722 137% 69007319 1039585 1.51% Other financial liabilities 29510 815 564220 327% 34951702 1 O19 495 292% Other 3092 195 - E 1281 892 H - Finanelal liabilities 138 004 817 2327611 169% 140 745 343 2 481 636 1.76% Net interest Income 1092 495 0.72% 1265221 0,8695 — E c — —
F-154
Foreign Exchange risk In relation to foreign exchange risk, the breakdown of assets and liabilities, by currency, as at 31 December 2013 and 2012, is analysed as follows:
USD GDP
United States Dollars Great Britain Pounds
BRL DKK JPY CHF SEK NOK CAD ZAR AUD AOA CZK MXN
Brazilian teal Danish krone Japanese yene Swiss franc Swedish krona Norwegian krone Canadian Doltlkr Rand
Australian Dolar Kwanza
Czech koruna Peso Mexican Other
Nate: asset / (liability)
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Spot
384 H42 504 707 149 020 3191 (13 404) 173 052 (13232) (43087) (1048) (14340) (2022) (136 583) 105 42900 (65 833)
949 568
Net exposure
(In thousands of euro)
(13 396) 13 621 éll Wa (11 664) 97228 (29) e 10680 (53) 7138 (156 583) 105
( 978) (1815
(758 046) 473 884 187 801
21947 27819 81 444 740 (49 539) 22 866 {5 569) (8510) (53 208) 5
63789 (26351)
31.12.2013 on Forward er elements (467 092) 69 054 (491 941) 855 (148 191) ( 218) (3278) 18 623 (16883) (54951) (20873) 13203 43156 1i 728 14287 2760 (43 378) 35932 26 034 (1 069 642) 58019
31.12.2012 Forward POM Nel exposure 742 185 99049 43 788 (472979) ( 970) ( 65) (183 686) (4738) ( 623) (21 579) 368 6 506 (40165) {5 841) 0357 (10475) 69612 (7778) (53) ( 428) 49 807 69 337 (23290) (7227) (7651) 4475 497 (5975 10 124 17 1631 - - (53 203) - 5 (15712) 9338 (2645) 121 789 26297 121 735 149 045 71638 206 418 —
Exposure fo peripheral Eurozone countries public debt
As at 31 December 2013 and 2012 the exposure to public debt from peripheral Burozone countries which are monitored by the Group is analysed as follows:
Financial assets held for trading and at fair value
1310228 60312 725
Derivative
instruments
31.12.2013
DI
Available-for- sale financial
(in thousands ofeuro)
18 {
652 47)
2 190 606 525 101 29 451
Held-to-maturity investments
145 167
4578 550 678 152 30 176 27A 170 811
Loans and advances to customers
Portugal 913 897 Spain 92786 Greece - Ireland - Italy - 1006 683
(I) Net amounts: receiva
:ble(pay able)
1381 667
F-155
2 905 567
147 891
5 460 413
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) {Amounts expressed in thousands of euro, except when indicated)
31.12.2012 Loans and Financial assets a gs Available-for- Derivat -to- i advances to held fortrading ` ` We NM sale financial Held to id Total customers at fair value instruments assets investments (in thousands ofeuro) Portugal 935 771 593 850 31143 2 519 596 220 041 4 300 401 Spain LL 121 568 ( 76) 608 278 - 719 891 Greece - 3430 - - - 3439 Ireland - - - - 27 483 27 483 Ttaly - 7926 - 21 399 - 29 325
1046 892 605 783 31067 3149273 247 524 5 040 539
=" oO E"
(1) Net amounts; receivable/(pay able)
All the exposures presented above, except loans and advances to customers, are recorded in the Group's balance sheet at fair value, which is based on market quotations or, in relation to derivatives, based on valuation techniques with observable market data. Loans and advances to customers are recorded at amortized cost net of impairment losses.
F-156
ESPIRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
A detailed exposure regarding securities recorded in available-for-sale financial assets, financial assets held for trading and held-to-maturity investments can be analysed as follows:
Nominal Amount Available-for-sale financial assets Portugal 2294 141 Maturity up to 1 year 252 551 Maturity exceeding 1 year 2.041 590 Spain 498 655 Maturity up to 1 year 250 500 Maturity exceeding 1 ycar 248 155 Greece 53 003 Maturity exceeding 1 year 53 003 Italy 160 000 Maturity up to | year 150 000 Maturity exceeding 1 year 18 000 3 005 799 Financial assets held for trading Portugal 100 127 Spain 45 114 145 241
Financial assets at fair value through profit or loss
Market
2134 526 251 119 1 883 407
515 385 249 711 265 674
28552 28 552
159 991 149 490 I0 501
2 838 454
94 591 50674
145 265
1207 129
7291
705 10 402
1225527
156731 3245
(in thousands oFeuro}
31.12.2013 Accrued Book value Impairment Fair value interest reserve
5e080 2190606 - ( 2416)
56 251 175 - 225 56 024 1939431 - ( 2641) 9 716 525 101 - { 676}
2 249 713 - 171 9714 275 388 - ( 847)
899 29 451 - 938
899 29 451 - 938
418 160 409 - 709
211 149 701 - 332
207 10 708 - 377 67113 2905567 - (1445)
1959 96 550 - -
2338 53012 - =
4 297 149 562 - -
Portugal 1 244 006 6 549 1213 678 - - Spain 7290 9 7 300 - - Greece 1219 20 725 - - Italy 10 400 - 10 402 - - 1262 915 6578 1232105 - -
Held-to-mnaturity investments
Portugal 157 440 2131 145 167 - - Ireland 3 000 97 27A - - 160 440 2228 147 891 - -
159 976
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Nominal Amount Available-for-s ale financial assets Portugal 2720 736 Maturity up to 1 year 195 431 Maturity exceeding | year 2 525 305 Spain 618 792 Maturity up to 1 year 389 350 Maturity exceeding 1 year 229 442 Greece 53 603 Maturily exceeding | year 53 003 Italy 20 100 Maturity exceeding 1 year 20 100 3 412 631 Financial assets held for trading Portugal 158 946 Spain 304 Italy 1656 160 906
Financial assets at fair value through profit or loss
Market
2 471 421 194 133 2277 288
600 096 383 681 216 415
28552 28 552
20975 20 975
3 121044
141 676 302 1667
143 645
440 395
259
3 439 6224
450 317
216 703 26 542
{in thousands of euro)
31.12.2012 Ai Fair val : cerued Book value Impairment air vate interest reserve 48175 2519596 - 191382 249 194 382 - 485 47 926 2325214 - 190 897 8182 608 278 - 2208 325 384 006 - 796 7857 224272 - 1412 899 29 451 - 938 899 29 451 - 938 424 21399 - 478 424 21399 - 478 57680 3178724 - 195 006 3 807 145 483 - - - 302 - - 34 1701 - - 3841 147 486 - - Portugal 524 625 7972 448 367 - - Spain 260 7 266 - - Greece 129 655 - 3 439 - - Italy 5 965 1 6225 - - 660 509 7980 458 297 - - Held-to-maturity investments Portugal 239 640 3338 220 041 - - Ireland 27 000 941 27 483 - - 266 640 4 279 247 524 - -
243 245
F-158
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Liquidity risk
Liquidity risk derives from the potential inability to fund assets while satisfying the maturity dates of commitments and from potential difficulties in liquidating portfolio positions without incurring excessive losses.
Liquidity risk can be divided into two types:
* Asset liquidity (market liquidity risk) — The inability to sell a particular asset due to lack of liquidity in the market, which results in increasing the bid / offer spread or applying a haircut to market value;
e Funding (funding liquidity risk) — The inability to, within the desired timeframe and currency, fund assets in the market and / or refinance debt that comes due. This inability can be reflected by a significant increase of financing cost or of collateral requirements in order to obtain funds. Difficulties of (re) financing can lead to asset sales, even incurring in significant losses. The risk of (re) financing should be minimized through adequate diversification of funding sources and maturities.
During 2013, the market sentiment continued to improve, with the reduction in the aversion risk levels and in the sovereign debt yields of the peripheral countries supported in expansionist policies from central banks, although there have been some politica! instability events during the year. In Portugal, the economic indicators have improved, with the beginning of an economic recovery cycle. In December the Republic accessed the markets for a switch operation of Treasury Bills and in January with a new five years issue of euro 3 250 million.
During the year, a significant number of banks have reimbursed the LTRO (Long Term Refinacing Operation) granted in December 2011, in the amount of approximately euro 446 000 million, The Group has repaid in advance euro 1 000 million under this facility.
Tn order to take advantage of the favourable conditions, the Group accessed the international capital markets in the beginning of the year with a senior debt issuance, not guaranteed, with a 5 years maturity, in the amount of euro 500 million, anticipating part of the reimbursements occurring during the year (euro 1.6 billion). In November the Group issued subordinated debt in the amount of euro 750 million. These issues, combined with a good performance in the client's deposits and the reduction of the loan's portfolio, allowed the Group to face the reimbursements of 2013, rebuy debt and reduce the ECB financing. Taking advantage of the improvement in the economic sentiment, in January 2014, the Group issued a 5 years debt in the amount of euro 750 million, with a 4% coupon, which corresponds to a 285 b.p. spread over the 5 years mid-swap rate. This level of placement was equal to the 5 years issue conducted in 2009.
At year end, assets eligible as collateral for rediscount operations were euro 20.9 billion, of which euro 18.6 billion were eligible at the European Central Bank.
In order to evaluate the global exposition to liquidity risk, reports have been prepared which permit not only the identification of negative mismatches, but also lead to the coverage of these situations.
F-159
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of enro, except when indicated)
The following tables present details of the mismatch in the residual terms for each of the main categories of assets
and liabilities:
ASSETS
Cash and deposits wih banks
Loans and advances to banks and sentral banks
Loans and advances 1o customers
Securities*
Other asseis, Dei
Of balance sheet tems (Co mmilments and Denvalives)
Tolal
EPA BILITIES
Deposils from banks, central banks and other loans Due Ie cuslomers
Debt securities issued
iher shert-lermiabililes
Ofbalance sheel stems (Commitments and Derivalives)
Toial
GAP (Assets - Llabilliies) Accumulated GAP
Buffer > 12 months
Fligible amennis
373 7211 44619 21455 1332 2361
* This caplion includes securities held by the Group which can be rediscounted with the ECB for liquidily purposes
ASSETS
Cash and deposits with banks
Loans and advances to banks and central banks
Loans and advances to customers
Securitics*
Ober assets, nel
Off-balançe sheei tems (Commitments and Derivalives)
Total
LIABILITIES
Deposits from banks, central banks and other loans Due to customers
Debt securilies issued
Other short-tenm liabibles
Off-balanee sheet items (Commitments and Derivalives)
Tolal
GAP (Assets - Liabilities) Accumalaled GAP
Buffer > 12 months
Higible amounts
420 6381 46770 21727 1351 6574
31.12.2013 From & Upto? days From 7 days From T toa From io 6 months to 1 More ihan i do E month months months year year (In million of euro)
378 H - - - a 6617 209 1M 162 47 43
621 2075 LHI 1684 2198 36 200
231 382 1924 1110 1930 15877
705 . Ka 4 123 982
78 220 823 383 536 320 8660 2836 +760 3343 4834 53422 1634 537 916 196 9H 10 522 2559 576 796 534 934 33665 29 70 1551 2013 603 9716 i310 3 26 2 il 38 n6 366 959 486 552 7946 5698 1642 4248 3231 3919 61947 2962 1244 512 112 1815 2962 4206 4718 4830 6615 2127 31.12.2012 From 6 From 7 days From 1 103 Fram 3 (o6 More Ihgn 1 Up to 7 days months lo 1 io 1 month monihs months year year (In million of euro)
420 - - - - - 5583 235 243 204 $l 35 1044 1813 2141 1347 2742 37163
340 921 1983 794 1259 16390 1829 - 5 1 - 16
313 139 268 455 513 4886
9529 3105 4 660 3301 4635 58 490 2097 537 717 479 778 11573
857 960 2244 747 DI 30653
H4 561 202 1069 433 12966 1607 - 12 4 - D
329 201 417 624 520 8101
5074 2259 5411 2923 1957 63305 4455 849 ( 751) 378 2678 4 455 5304 4553 4931 7609
700
* This caption includes securities held by the Group which can be rediscounted with the ECB for Equidily purposes
The table reflects the amounts of assets, Habilities and off-balance sheet items with defined or determinate cash- flows classified by the period to maturity. In the event that no maturity is defined (such as for deposits, overdrafts, current accounts and commitments with third parties), the Group used a behaviour model based on historical information, which reflects the expected maturity of the cash flows. For deposits with stated maturities, the Group also used a behaviour model to estimate expected maturity.
F-160
ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The one year cumulative gap went from euro 7 609 million in December 2012 to euro 6 645 million as of December 2013.
Additionally, and in accordance with Instruction 13/2009 of the Bank of Portugal, the liquidity gap is defined by the indicator [(Net Assets - Volatile Liabilities) / (Assets - Net assets) * [00] on each residual cumulative maturity scale. Net assets include cash and net securities and volatile liabilities include debt issued, commitments, derivatives and other liabilities. This indicator allows a characterization of the wholesale risk of institutions.
As at 31 December 2013, the one year liquidity gap was -0.6, which compares to -3.1 from the same period last year.
It may be noted that the above liquidity gap figures, calculated in accordance with the determinations of Instruction 13/2009 of the Bank of Portugal, do not include the Group's insurance companies, whose activity is regulated by the Portuguese Insurance Institute.
In order to anticipate possible negative impacts to liquidity, ESFG considers different stress scenarios (moderate and severe) in terms of liquidity, different time frames and different types of impact (systemic, Group specific or combined). For example, in the systemic scenario, closure of the wholesale markets is simulated, while in the scenario specific to the Group, a run off of customer deposits from retail and non-retail is simulated, with different levels of severity.
From 1 January 2014 is in force the CRD/CRR, under the Basel III framework. In what concerns Liquidity Risk, the highlights are the mandatory requirements regarding the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR). As at 31 December 2013, the Group had met the ratio the limit set for 2015 in what concerns LCRA. In January the Bank of International Settlements published a document in connection with the NSFR calculation review. The Group continues to follow every legislative change in order to comply with its regulatory obligations.
Operational risk
Operational risk represents the risk of losses resulting from failures in internal procedures, people behaviours, information systems and external events.
To manage operational risk, it was developed and implemented a system that standardises, systematises and regulates the frequency of actions with an objective of identification, monitoring, controlling and mitigation of risk. The system is supported at organizational level by a unit within the Global Risk Department of BES, exclusively dedicated to this task, and by representatives designated by each of the relevant departments and subsidiaries.
Insurance risk
Insurance risk — inherent risk related to the selling of insurance contracts, underwriting policy, pricing, reserving, claims management and reinsurance arrangements.
Pricing is based on actuarial methodologies, revised on a regular basis in order to ensure a rigorous policy underwriting and risk acceptance.
Risks underwritten that require selective acceptance are analysed centrally. Evidence of the underwriting conditions and identification of the decision maker are required.
The technical reserves, specifically the claims reserves, are analysed on a monthly basis. The adequacy of the
insurance liabilities is reviewed on a regular basis. Regarding the evaluation of reserves, new models are being developed internally by the Group's Insurance companies based on stochastic methodologies.
F-161
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amounts expressed in thousands of euro, except when indicated)
The table below reflects the claims reserves development, excluding penstoners arising out from workers
compensation claims:
Initial eslimate of chims Eabilüies
Cumulative payments Onc yearlater Two years Dier Three yearbler Fouryears later Five year bler Six years bier Seven years bier Baht years Ker Nme years later Ten years bier
Re-estimated claims Inbflies Che yearkter Twa years later Three yearlater Fouryears later Five year bier Six years Bler Seven years bler Eight years titer Nine years later Ten years later
Cumubittve sumhiis (deficit)
Gn thousands ofeurc}
269 575 274911 279 695
337363 334297 332408 B31 O75 343336 3410372 335316 341 335 328 545 322396
(16381)
921174 Hi 526 176 790 2017[6 220093 253 860 243 757 250 265 255924
338 836 334318 333 156 33918 3364647 323 690 327291 313 502 305 675
23058
105 504 152627 191 998 213580 230853 241762 253219 261492
354 407 356 147 554218 352070 331796 31H38 319336 312892
30908
37501
too 056 145 308 171 305 122108 206571 216254 226 131
366-H9 348133 33& 431 31332 313127 295603 284 072
90912
160953 17757 189 563 201227
566 560 540376 316053 311642 290261 275312
H9045
9512 129339 BIBI 165 142 139 263
371201 431 652 219 347 790304 272225
125 771
352 6X) 327154 294372 272 645
122392
100 636 1971 132241
351304 311228 279 471
100771
517 106 27490?
as 866
2012 2013
345377 305 238 91466
260 364
55013
Longevity risk covers the uncertainty in the ultimate loss due to policyholders living longer than expected and can arise for example, in annuity portfolios within the life Insurance and workmen's compensation portfolios within
non-life insurance.
Longevity risk is managed through pricing, underwriting policy and by regularly reviewing the mortality tables used for pricing and establishing reserves. Where longevity is found to be improving faster than assumed in the mortality tables additional reserves are established and mortality tables are updated.
Any adjustments resulting from changes in reserves estimates are reflected in current results of operations. However, because (he establishment of claims reserves is an inherently uncertain process, there can be no assurance that ultimate losses will not exceed existing claims reserves, and this risk is covered by the additional solvency capital.
F-162
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Regarding life line of business, the main actuarial assumptions defined in each contract, are as follows:
Mortality Table "Technica! rate Retirements savings plans aud capilnlizalion products Up to December 1997 GKM 80 4% From January 1998 to February 1999 GKM 80 3.25% From July 1999 to February 2003 GKM 80 2.25% and 3% From Mars 2003 to December GKM 80 2.75% Afler January 2004 GKM 80 Set percalendaryear(*) Insurance in case of life Rents Up to June 2002 TV 7477 4% FromJuly 2002 to December 2003 TVI 3% FromJanuary 2004 to August 2006 GKE 95 3% A fer January 2004 GKM - 3 years 2% Other insurance Insurance in case of death Up to December 2004 GKM 80 4% After January 2005 GEM 80 0% to 2% Insurance mixed Up to September 1998 GKM 80 395
After October 1998 GKM 80 3%
(*) In 2013 the technical rate was 3% (2012: 2%)
For liability adequacy test purposes of the life business the mortality assumptions are based on best estimates derived from portfolio experience investigations. Future cash flows are evaluated and discounted at government bonds rate.
The main mortality assumptions are as follows:
Mortality Table Annuities GRM 95 Savings and other contracts 30% GKM 80
For liability adequacy test purposes, the calculation of the present value of Workmen's Compensation mathematical reserves was performed with the mortality table TV 73/77 (2012: TV 73/77) and risk free rate.
F-163
ESPÍRITO SANTO FINANCIAL GROUP S.A.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS AT 31 DECEMBER 2013 AND 2012 — (Continued)
(Amonnts expressed in thousands of enro, except when indicated)
The maximum risk exposure per event after reinsurance and after deductibles per segment and product line is
summarised below:
Line of business
Personal Accident (Credit Protection) Personal Accident
Workers Compensation
Motor - Third Party Legal Liability Motor - Own Damage
Bonds - Bonds
Bonds - Fidelity
Engineering
Fire /M Risk/Lop (Simple Risks)
Fire /M.Risk/Lop(Condominiun)
Fire /M.Risk/Lop(Comm&lIudust Risks} Fire /M.Risk/Lop - Cat Cover
Fire /M.Risk/Lop - XOL Cover
Fire AA Risk/Lop - XOL Aggregate Cover Property Stop Loss
Gencral Third Party Liability Environmental Liability
Director'S Liability Art 396
Marine Hull
Marine Hull- Fleets
Marine Cargo
Marine Cargo & Hull - Xol Cover Health — Dread Illness
Health — Medical Expenses Assistence
Life - Mortgage
Life - Group
Life - Individual Credit Life - Mortgage 2.0 Life - Natural Disasters Life - Working Cover Life - Credit Protection Life - Assistence
Capital Management and Solvency Ratio
Type of reinsurance
Quota Share Excess Of Loss Excess OF Loss Excess OF Loss Excess OF Loss
Quota Share
Quota Share
Proportional
Proportional
Proportional
Proportional Excess Of Loss Excess Of Loss Excess Of Loss Excess Of Loss Excess Of Loss
Quota Share
Quota Share
Proportional
Proportional
Proportional Excess OfLoss
Quota Share Excess OfLoss
Quota Share
Proportional Proportional Proportional Proportional Excess OfLoss Excess OfLoss Quota Share Quota Share
Net retention
Maximum treaty liability
(in thousands of euro)
300 500 1000 1000 20% 2096 1250 1 600 1000 1000 15 000 2 000 250 AAL 1 000 10596 of'NEP 150 20% 2095 250 325 200 400 20% 25
751100 75 1 100 75 1100 100 1000 100
100% 14 700 39 500 49 000 14 000
400 200
13 750 20000 35 000 40 000 165 000
8000
1750
7500
4 850
250 250
5 000
6 500
4 600
3 500
80% 325 100%
1000 1000 1000 1000
10 000 per disaster
1 500 perevent 100% 100%
The main goals of capital management are (i) to allow adequate growth of activities through the generation of enough capital to support the increase of assets, (ii) fulfilment of the minimum capital adequacy requirements as defined by the supervisory authorities and (iii) to ensure the fulfilment of the Group’s strategic goals with respect to
capital adequacy.
The strategy for capital adequacy management is determined by the Executive Committee and is integrated into the
strategic goals of the Group.
The capital metrics are incorporated in the main management control instruments and monitoring is undertaken
frequently, thus permitting a quick response to fulfil the defined goals.
F-164
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The Group is subject to prudential supervision by the Bank of Portugal which, in accordance with the Capital Adequacy Directive of the EU, establishes the prudential rules to be observed by the institutions under its supervision. These rules determine a minimum ratio of Own funds to Capital requirements of risks assumed, which institutions are required to fulfill.
Within the implementation of the Basel II capital accord and in accordance with Decree-Law 103/2007 and Decree- Law 104/2007, the Group was authorized to employ, as from 31 March 2009, the Internal Rating Based Foundation Approach — TRBF for credit risk and the Standardized Approach — TSA for operational risk.
The capital elements of ESFG are divided into: Core Tier I, Tier L Tier [T and Deductions, as follows:
e Core Tier I: This category includes share capital, share premiums, eligible reserves, the certified net profit to be retained for the year and non-controlling interests. The fair value reserves are excluded except for deduction of negative fair value reserves associated with shares or other equity instruments; additionally, deductible from Core Tier I are the balance sheet amounts referring to goodwill, intangible assets, actuarial losses (above the prudential corredor) arising from responsibilities for post-employment benefits to employees and, where applicable, the net loss for the period. Excess Large exposures above a base amount set by the Bank of Portugal are also deducted.
e Tier]: In addition to the amounts considered as Core Tier I, this category includes preference shares and hybrid capital instruments. Alternatively, half of: (i) investments of above 10% of the capital of financial and insurance institutions: (2) investments of below 10% of the capital of financial and insurance institutions above a given limit; and the difference between the expected loss calculated on exposures subject to IRBF treatment and the corresponding loss provisions, are deducted from Tier I.
e Tier I: Essentially incorporates the eligible subordinated debt and 45% of the positive fair value reserve associated with equity securities. The other half of the amounts deducted 50% from Tier T are deducted from Tier II.
e Deductions: The base amount of excess Large exposures are deducted here as well as prudential amortization of assets received in the recovery of non-performing loans.
The prudential rules determine, additionally, that the Tier TT cannot exceed Tier I and that a component of Tier II (known as Lower Tier II) cannot exceed 50% of overall Tier II.
In December 2008, the Bank of Portugal issued Notice 11/2008 which established a transition period of four years, from December 2009 to December 2012, for the recognition of the actuarial gains/losses determined in 2008, This transition period ended in December 2012.
In May 2011 and in the context of the negotiation of the Financial Assistance Programme to Portugal — with the European Commission, the European Central Bank and the International Monetary Fund — the Bank of Portugal issued Notice 3/201 1, establishing new minimum levels of solvency to be observed by financial groups subject to its supervision. It determined that Portuguese credit institutions reach a Core Tier I ratio of no less than 9% by 31 December 2011 and 10% by 31 December 2012,
At the same time, the European Banking Authority (EBA), using somewhat different criteria for Own funds and Capital requirements determined that European banks must reach a Core Tier I ratio of 9% by 30 June 2012,
F-165
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 2013 and 2012, the main movements occurred in Basic Own Funds (Tier I) are as follows:
31.12.2013 31.12.2012
(in million of euro)
Balance at beginning of the year 6 594 5732 Capilal increase ( D 489 Increase/(decrease} in non-controlling interest ( 235) 596 Retained profit/(loss) for the year ( 864) 315 Changes on actuarial losses ( 95) ( 526) Goodwill 116 ( 296) Recognition ofthe impact of adopting IFRS (7) ( 12) Variation of preference shares recognised as Tier I ( 39) ( 37) Exchange of hybrid instrumets - - Unrecognised losses on financial instruments ( 24) 186 Investments in banking and insurance entities ( 77) ( 119) Risks deducted from basic own funds 67 299 Other effects 49 ( 33) Balance at endof tlie year 5 484 6 594
F-166
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLEDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The capital adequacy of ESFG Group as at 31 December 2013 and 31 December 2012 is presented as follows: 31.12.2013 31.12.2012
{in million of euro)
A- Capital Requirements
Share Capital, Issue Premium and Treasury Stock 1768 1753
Net Income, Legal and Statutory Reserves, and Retained Famings ( 596) 265 Non-controlling, interest 5013 5326 Intangible Assets, actuarial losses, goodwill and other ( 598) ( 696)
Risks deducted from basic own funds - ( 67)
AI- Basic own funds excluding preference shares (Core Tier I) (AT) 5587 6 581 Preference Shares 244 282 Deductions of investments in Financial institutions, insurance companies and others ( 347) ( 269)
A2- Basic own funds (Tier I) (A2) 5 484 6 594 Positive Fair Value Reserves and Others (45%) 162 48
Bligible Subordinated Debt 1380 1158 Deductions of invesiments in Financial institutions, insurance companies and others ( 47 ( 269) Complementary own funds (Tier ID 1195 937 Deductions ( SA) ( 7D) Hegibte own funds (A3) . 6595 7 460
B Risk Asset Equivalents (Basel II - Standard)
Calculated according Notice 05/2007 (Credit Portfolio) 55 891 59 634 Calculated according Notice 8/2007 (Trading Portfolio) 1209 1548 Calculated according Notice 9/2007 (Operational Risk) 3503 3881 Total Risk Asset Equivalent (B2) 60 603 65063
C Prudential Ratios Basel II
Ratio Core Tier 1 (A1/B2) 9.2% 10.1% Ratio Tier 1 {A2/B2) 9.0% 10.1% Solvency Ratio (A3 / B2) 10.9% 11.5%
As at 31 December 2013 the Core Tier 1 ratio was 9.2% (31 December 2012: 10.1%).
Tn order to comply with the minimum defined by the Bank of Portugal under Basel II rules, applicable as of 31 December 2013, ESFG is currently putting in place a plan which will allow achieving a Core Tier I ratio of at least 10%, This plan in being discussed with the Bank of Portugal and is in an advance stage, being expected to start its execution during the first semester of 2014.
Under BIS III (CRD IV/CRR) which will be in force as from 1 January 2014, the Common Equity Tier I ratio,
employing the transitional provisions, is 8.5%, or 8.8% considering the waiver of Article 84 (5) and the eligibility of the minority interests in BESPAR. This result is above the Bank of Portugal's requirement (minimum of 7.096).
F-167
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
Plans Financing and capitalization (2011 - 2015)
Following the signing of the Memorandum of Economic and Financial Policies, the Portuguese Government and the European Commission (EC), European Central Bank (ECB) and International Monetary Fund (IMP), Portuguese banks, and financial holding companies that consolidate Portuguese banking subsidiaries, have had to develop, quarterly, financing and capital plans for the period from 2011 to 2015, in order to demonstrate the achievement of the following objectives:
e The loan to deposit ratio should, preferably, be reduced to a maximum value of 120% as from December 2014; The stable funding ratio should be 100% as from December 2014; The Core Tier I ratio must be at least 9% as of 31 December 2011 and 10% as of 31 December 2012, as established in Notice 3/2011 of Bank of Portugal.
Additionally, the dependence of their branches and subsidiaries abroad on domestic Portuguese funding should be minimized; the institutions must reduce their dependence on funding from the ECB; and they should develop policies to support sectors of the Portuguese economy, namely small and medium enterprises. The financing and capital plans should consider moderate access to short-term markets and a gradual opening of medium and long term markets from the fourth quarter of 2013.
In order to prepare the plans, projections of relevant domestic macroeconomic variables, of GDP growth in the geographic areas of greatest relevance to the activilies of the banks and further projections of interest rates and other parameters necessary for drawing up the plans were provided by the Bank of Portugal after consultation with the EC/ECB/IMF. Together with the plan for the period in reference, a stress test exercise is required, where the banks should, in an extreme scenario, present a Core Tier Tratio higher than 6% during the period (2011-2015).
F-168
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 - (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 54 - CONTRACTUAL COMMITMENTS
Securitization transactions
Following the downgrade by Moody's of the Portuguese Republic in February 2012, this agency set the maximum rating attributable to bonds issued in securitized operations as Baal. Consequently, the operation of securitization of small and medium enterprises put together by BES in December 2010 — Lusitano SME No.2 — lost its eligibility as collateral for rediscounting at ECB and as a result BES chose to exercise its call option on 23 March 2012.
Contract Support Annex (CSA)
BES has a set of contracts negotiated with counterparties with whom it deals in derivative in the OTC market. CSA takes the form of a collateral agreement established between two parties negotiating derivatives with each other on this market, with the main objective to provide protection against credit risk, establishing for that purpose a set of rules regarding collateral. Derivatives transactions are regulated by the International Swaps and Derivatives Association (ISDA) and have minimum margin requirements that may change according to the rating of the parties.
NOTESS- TRANSACTIONS WITH NON-CONTROLLING INTEREST AND CHANGES IN THE SCOPE OF CONSOLIDATION
Transactions with non-controlling interest
As explained in Note 1, during the year ended 31 December 2012, the Group entered into several transactions with non-controlling interest, the most significant being the transactions with non-controlling of BES, namely the net acquisition of an additional interest of 0.8696 through the acquisition in the market of 29 510 581 shares.
These transactions were accounted for in accordance with the accounting policy described in Note 2.2 as transactions with equity holders in their capacity as equity holders. Therefore, the difference between the net consideration paid and the non-controlling interest acquired, in the amount of euro 45 628 thousand as detailed below, was recognised in equity.
The balance of the components of other comprehensive income, namely the fair value reserve and foreign exchange differences were reallocated in order to reflect the new percentage held.
The impact of these transactions with the non-controlling interest occurred in 2012 is as follows:
31422012 | (in thousands of euro)
Net consideration paid 17 525
Consideration paid by non-controiling interest (1191) Net consideration paid attributable to ES FG 16334 Non-controling interest acquired 58 498 42 164
Reallocation of components of other comprehensive income
Fair value reserve 6 247 Exchange diferences 34 Gain recognised in equity resulting from transactions with BES non-controlling interest 48 445 Other transactions with non-controlling interest (2817) Gain recognised in equity resulting from transactions with non-controlling interest 45 628
F-169
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The transaction with non-controlling occurred in 2013 did not have a significant impact in the Group's consolidated financial statements.
Loss of control over subsidiaries occurred in 2012 Pastor Vida
As referred in Note 32, in the first semester of 2012, Banco Popular acquired a controlling interest on Banco Pastor, the legal merger between these two entities having taken place on 5 July 2012.
The change in control of Banco Pastor had a significant impact in the implementation of Group's strategy regarding Pastor Vida and therefore in the second quarter of 2012, the Group took the deciston, as permitted within the shareholders agreement established between Tranquilidade and Banco Pastor, to exercise its option to put Pastor Vida shares back to Banco Pastor. The sale was completed during the second semester of 2012. Therefore, the related goodwill and value in force, amounting to euro 23.1 million and euro 57.9 million, respectively, were derecognised.
The impact of the loss of control over Pastor Vida in ESFG consolidated financial statements as at 31 December 2012 can be analysed as follows:
31.12.2012
(in thousands of euro) Net consideration received 40 072 Pastor Vida net equity at the date ofthe loss of control (T) 103711. (D) Pastor Vida net equity at the date of the loss of control attributable to ESFG 51,856 Pastor Vida good will 23 110 Deferred and contingent consideration recognised . (46 100) Pastor Vida 28 866 Gain on the loss of control of Pastor Vida recognised in the income statement 11 206
(1) includes value in force amountiug to 57,9 million ES Saúde
As referred in Note 32, in November 2012 (i) Rio Forte Investments, S.A. (Rio Forte) acquired an additional 19,5% stake in ES Saüde, becoming to have a 44.596 shareholding in this company; (ii) ESFG and Rio Forte signed a shareholders" agreement under which Rio Forte assumes control over ES Saúde governing bodies; and (iii) Rio Forte acquired from ESFG a call option, currently exercisable up to May 2013, over 5.5% of ES Saüde sharecapital plus 1 share, giving Rio Forte the current ability to exercise control over the majority of the voting rights of ES Saüde.
As a result of the loss of control over ES Saúde in 2012, this entity is no longer fully consolidated by ESFG and is included in its consolidated financial statements following the equity method (see Note 33).
F-170
ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of enro, except when indicated)
In accordance with paragraph 34 of IAS 27 and with the accounting policy described in Note 2.2, the non- controlling interest retained by ESFG in ES Saúde following the loss of control, was remeasured to fair value and the resulting gain was recognised in the income statement as follows:
31423012 |
(in thousands of euro)
Retained interest in ES Saúde 43% Estimated fair value of BS Saúde at the tine control was lost 268 795 Attributable to ESFG 115313 Book value of ES Saúde at the time control was lost ES Saúde net equity at the date ofthe loss of control 128 160 Attributable to ESFG 54 981 Gain on the loss of control of ES Saúde recognised in the income statement (1) 60 332 Attributable to ESFG 45 007 Attributable to non-controlling interest 15 325 60 332
(1) arising from the remeasurement of the retained non-controlling interest
The fair value of ES Saúde at the time the contro! was lost, was estimated based on the transaction price between Rio Forte and third parties occurred in November 2012, as it was considered as a recent comparable transaction. Notwithstanding, this fair value was back tested, ESFG having prepared a valuation. report based on a Discounted Cash Flow methodology using the financial budget approved by management, an Weighted Average Cost of Capital (WACC) between 9.0% and 9.3% and a terminal growth rate of 296.
Following paragraph 37 of IAS 27, the fair value of the non-controlling interest retained by ESFG in ES Saüde, was assumed as the cost on initial recognition ofthe investment in this associate for the purposes of the initial application of the equity method in accordance with TAS 28.
Business combinations occurred in 2012 Acquisition of BES Vida
Until 30 April 2012, BES held a 50% interest in BES Vida, Companhia de Seguros, S.A. (BES Vida), a life insurance company, which distributes its products in Portugal and Spain, through BES branch network. Crédit Agricole owned the remaining 50 96 and controlled its activities.
As referred in Note 1, in May 2012, BES acquired, from Credit Agricole, the remaining 50% of the share capital of BES Vida with the objective of leveraging the marketing of BES Vida's insurance products.
Following this acquisition, BES became to hold the entire share capital of BES Vida and has the management control over its activities. Therefore, BES Vida, which qualified as an associate and was included in the consolidated financial statements of BES following the equity method, has become a subsidiary and is being fully consolidated since May 2011.
The total investment amounted to euro 225 million euro, paid in cash.
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ESPIRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (mounts expressed in thousands of euro, except when indicated)
This transaction was accounted for in accordance with the provisions of paragraph 42 of IFRS 3 related with business combination achieved in stages, which requires any previously held equity interest in the acquire, to be remeasured to fair value at the acquisition date and the resulting gain or loss to be recognised in the income
statement. The amounts recognised in the fair value reserve up to the date in which control in acquired, are required to be recycled to the income statement.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As at 1 May 2012, the balance sheet of BES Vida included in the BES Group consolidated financial statements can be analysed as follows:
(in thousand of
euro) Assets Cash and deposits with banks 198 648 Other financial assets at fair value through profit or loss 2 759 100 Available-for-sale financial assets 1 917 328 Held-to-maturity investments 159 551 Property and equipment 93 864 Intangible assets 76 641 Technical reserves of reinsurance ceded 2512 Income tax assets 112 Other assets 178 712 5386 468 Liabilities Technical reserves 1880631 Investment contracts 3 053 344 Other financial liabilities 194 434 Income tax liabilities 2342 Other liabilities 40 29] 5 171 042 Equity Share Capital 50 000 Other reserves and retained eamings 165 426 215 426 5 386 468
The fair value of recognised identifiable assets acquired and liabilities assumed include, under Intangible assets, the amount of euro 107 768 thousand related to the present value of the business in force acquired related to life insurance contracts (Value in Force) (euro 76 515 thousand net of taxes). This asset will be amortised over the remaining lifetime of the contracts.
It should be mentioned, however, that following the reinsurance treaty signed in 2013 by BES Vida, described in
Note 32, the net amount of euro 137 476 thousand in relation to the value in force acquired was derecognised, liaving the remaining amount, been recognised under Other liabilities.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The goodwill recognised as a result of this acquisition amounts to euro 234 574 thousand, as follows:
(in thousand of
% euro)
Goodwill as the excess of:
Consideration transferred 225 000
Acquisition date fair value ofthe 50% interest previously hekd in BES Vida 225 000 450 000
Over:
Fair value of identifiable assets and liabilities acquired (1) 100 215 426
Goodwill determined on a provisional basis 234 574
—————— 3
(1) meusured on a provisional basis
The goodwill is attributable mainly to the potential growth of the market where BES Vida operates.
The impact in the 2012 income statement of measuring at fair value the previously held equity interest in BES Vida,
representing 50% of its share capital, following the requirements of paragraph 42 of IFRS 3, can be analysed as follows:
(in thousand of
euro)
50% interest previously held in BES Vida
Fair value 225 000
Book value 66 931 Loss on remeasurement of the previously held in Bes Vida 158 069 Recognition in the income statement ofthe accumulated fair value reserve
of BES Vida appropriated on the acquisition of control in Bes Vida ( 70 796)
Loss arising from tlie acquisition of control in BES Vida 87 273
(1) Amount before non controling interest. After non controlling interest the fair value recycled to the income statement amount to euro 19.8 miilion.
The profit of BES Vida from the acquisition date to 31 December 2012 included in the profit for the year attributable to the equity holders of the Company, amounts to euro 32.8 million. If BES Vida had been consolidated
from 1 January 2012, the profit for the year attributable to the equity holders of the Company would have increased by euro 0.7 million.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 56 - RECENTLY ISSUED PRONOUNCEMENTS 56.1 Recently issued pronouncements already adopted by the Group
In the preparation of the consolidated financial statements for the year ended 31 December 2013, the Group adopted the following standards and interpretations that are effective since 1 January 2013:
IAS 19 Revised — Employee Benefits
Tn 2013, the Group adopted the amendments to “LAS 19 — Employee Benefits" issued in 2011 and effective (with retrospective application) for annual periods beginning on or after Ist January 2013. Those amendments were endorsed by European Commission Regulation 475/2012, 5th June. The amendments to IAS 19, included the elimination of the corridor mechanism and the concept of expected returns on plan assets.
The Group made a voluntary change in the accounting police related to actuarial gains and losses arising from its post employment benefits which from 2011 are charged to equity, under other comprehensive income, therefore the adoption of IAS 19 (revised) had no impact in the Group's financial statements in what concerns the recognition of actuarial gains and losses.
However, as a result of IAS 19 (2011), the Group has changed its accounting policy with respect to the basis for determining the income or expense related to defined benefit. Under JAS 19 (2011), the Group determines the net interest expense (income) for the period on the net defined benefit liability (asset) by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the net defined benefit liability (asset) at the beginning of the annual period. Consequently, the net interest expense (income) includes interest cost on the defined benefit obligation net of a theoretical return on the plan assets, both calculated using the discount rate applied in the determination of the defined benefit obligation (see Note 14).
Previously, the Group determined interest income on plan assets based on their long-term rate of expected return.
IFRS 13 — Fair Value Measuremeni
IFRS 13 establishes a single framework for measuring fair value and making disclosures about fair value measurements, when such measurements are required or permitted by other IFRSs. In particular, it unifies the definition of fair value as the price at which an orderly transaction to sell an asset or to transfer a liability would take place between market participants at the measurement date.
In accordance with the transitional provisions of IFRS 13, the Group has applied the new fair value measurement guidance prospectively. The methods and assumptions used in estimating the fair values of financial assets and liabilities are disclosed in Note 52.
Notwithstanding the above, the change had no significant impact on the measurement of the Group's assets and liabilities, once the major change in the calculation of the fair value was the inclusion of the credit value adjustments (CVA) and debit value adjustments (DV A), which had no significant impact in the valuation of derivatives.
IAS 1 Presentation of Financial Statements - Presentation of items of other comprehensive income As a result of the amendments to IAS 1, the Group has modified the presentation of items of other comprehensive income in its consolidated statement of other comprehensive income, to present separately items that would be
reclassified to profit or loss in the future from those that would never be. Comparative information has also been re- presented accordingly.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
The adoption of the amendment to IAS 1 has no impact on the recognised assets, liabilities and comprehensive income of the Group.
IFRS 7 (Amended) - Financial Instruments: Disclosure — Offsetting Financial Assets and Financial Liabilities
The IASB, issued on 16th December 2011, amendments to “IFRS 7 — Financial Instruments: Disclosure — Offsetting Financial Assets and Financial Liabilities", effective (with retrospective application) for annual periods beginning on or after [st January 2013. Those amendments were endorsed by EU Commission Regulation 1256/2012, 11th December.
These amendments required an entity to disclose information about what amounts have been offset in the statement of financial position and the nature and extend of rights to set-off and related arrangements (e.g. collateral arrangements).
The new disclosures are required for all recognized financial instruments that are set off in accordance with TAS 32 Financial Instruments: Presentation, The disclosures also apply to recognised financial instruments that are subject to an enforceablé master netting arrangement or similar agreement, irrespective of whether they are set off in accordance with IAS 32.
The adoption of the amendment to IFRS 7 had no impact on the consolidated financial statements,
Improvements to IFRS (2009-2011)
The annual improvements cycle 2009-2011, issued by IASB on 17th May 2012, introduce amendments, with effective date on, or after, 1st January 2013, to the standards IFRSI, IAS1, IAS16, IAS32, TÀS34 and IFRIC2.
IAS | Presentation of Financial Statements This improvement clarifies the difference between voluntary additional comparative information and the minimum required comparative information. Generally, the minimum required comparative information is the previous period.
IAS 16 Property Plant and Equipment This improvement clarifies that major spare parts and servicing equipment that meet the definition of property, plant and equipinent are not inventory
IAS 32 Financial Instruments, Presentation and IFRIC 2 The improvement clarifies that income taxes arising from distributions to equity holders are accounted for in accordance with IAS 12 Income Taxes, avoid any interpretation that may mean any either application.
IAS 34 Interim Financial Reporting
The amendments align the disclosure requirement for total segment assets with total segment liabilities in interim financial statements. This clarification also ensures that interim disclosures are aligned with annual disclosures in relation to the changes of profit and loss account and other comprehensive income.
The adoption of these improvements had no impact on the consolidated financial statements.
IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine
The International Financial Reporting Interpretations Committee (IFRIC), issued on 19th October 2011, “IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine", effective (with retrospective application) for annual periods beginning on or after Ist January 2013. Those amendments were endorsed by EU Commission Regulation 1255/2012, 11th December.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amonnts expressed in thousands of euro, except when indicated)
Give the nature of the Group's operation, this interpretation did not have any impact on the consolidated financial statements.
56.2 The Group decided to opt for nof having an early application of the following standards endorsed by EU but not yet mandatory effective
The new standards and interpretations that have been issued, but that are not yet effective and that the Group has not yet applied, are analysed below. The Group will apply these standards when they are effective.
LAS 32 (Amended) - Financial Instruments: Presentation — Offsetting Financial Assets and Financial Liabilities
The IASB, issued on 16th December 2011, amendments to “LAS 32 — Financial Instruments: Presentation — Offsetting Financial Assets and Financial Liabilities", effective (with retrospective application) for annual periods beginning on or after 1st January 2014. Those amendments were endorsed by EU Commission Regulation [256/2012, 11th December.
The IASB amended IAS 32 to add application guidance to address the inconsistent application of the standard in practice. The application guidance clarifies that the phrase ‘currently has a legal enforceable right of set-off means that the right of set-off must not be contingent on a future event and must be legally enforceable in the normal course of business, in the event of default and in the event of insolvency or bankruptcy, of the entity and all of the counterparties.
The application guidance also specifies the characteristics of gross settlement systems in order to be considered equivalent to net settlement.
The Group is not expecting a significant impact from the adoption of the amendment to IAS 32.
IAS 27 (Revised) — Separate Financial Statements
The IASB, issued on 12th May 2011, amendments to “IAS 27 — Separate Financial Statements", effective (with prospective application) for annual periods beginning on or after Ist January 2014. Those amendments were endorsed by EU Commission Regulation 1254/2012, 11th December.
Teking in consideration that IFRS 10 addresses the principles of controls and the requirements relating to the preparation of consolidated financial statements, LAS 27 was amended to cover exclusively separate financial statements.
The amendments aimed, on one hand, to clarify the disclosures required by an entity preparing separate financial statements so that the entity would be required to disclose the principal place of business (and country of incorporation, if different) of significant investments in subsidiaries, joint ventures and associates and, if applicable, of the parent.
The previous version required the disclosure of the country of incorporation or residence of such entities.
On the other hand, it was aligned the effective dates for all consolidated standards (IFRS10, IFRS11, IFRS12, TFRS13 and amendments to IAS 28).
The Group expects no impact from the adoption of this amendment on its financial statements.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
IFRS I0 Consolidated Financial Statements
The IASB, issued on 12th May 2011, "IFRS 10 Consolidated Financial Statements", effective (with retrospective application) for annual periods beginning on or after Ist January 2013. These amendments were endorsed by EU Commission Regulation 1254/2012, 11th December, which allows a delayed on mandatory application for Ist January 2014.
IFRS 10, withdraw one part of IAS 27 and SIC 12, and introduces a single control model to determine whether an investee should be consolidated.
The new concept of control involves the assessment of power, exposure to variability in returns and a linkage between the two. An investment controls an investee when it is exposed, or has rights, to variability returns from its involvement with the investee and is able to affect those returns through its power over the investee (facto control).
The investor considers whether it controls the relevant activities of the investee, taking into consideration the new concept. The assessment should be done at each reporting period because the relation between power and exposure variability in retums may change over the time,
Control is usually assessed over a legal entity, but also can be assessed over only specified assets and liabilities of an investee (referred to as silo).
The new standard also introduce other changes such as: i) accounting requirements for subsidiaries in consolidation financial statements are carried forward from IAS 27 to this new standards and ii) enhanced disclosures are requires, including specific disclosures for consolidated and unconsolidated structured entities.
The Group has not carried out a thorough analysis of the impacts of the application of this standard. Given the introduction of a new control model the Group may need to change its consolidation conclusion in respect of its investees.
IFRS 11 — Joint Arrangements
The TASB, issued on 12th May 2011, "IFRS 11 Joint arrangements", effective (with retrospective application) for annual periods beginning on or after Ist January 2013. These amendments were endorsed by EU Commission Regulation 1254/2012, 11th December, that allows a delayed on mandatory application for Ist January 2014.
IFRS 11, withdraw IAS 31 and SIC 13, defines “joint control” by incorporating the same control model as defined in IFRS 10 and requires an entity that is part of a “join arrangement" to determine the nature of the joint arrangement (“joint operations" or "joint ventures") by assessing its rights and obligations.
TFRS 11 removes the option to account for joint ventures using the proportionate consolidation. Instead, joint arrangements that meet the definition of “joint venture" must be account for using the equity method (IAS 28).
The Group expects no impact form the adoption of this amendment on its financial statements.
IAS 28 (Revised) — Investments in Associates and Joint Ventures
The EASB, issued on 12th May 2011, “IAS 28 Investments in Associates and Joint Ventures", effective (with retrospective application) for annual periods beginning on or after Ist January 2013. These amendments were endorsed by EU Commission Regulation. 1254/2012, 11th December, which allows a delay on mandatory application to 1st January 2014.
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ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
As @ consequence of the new IFRS 11 and IFRS 12, IAS 28 has been renamed as LAS 28 Investments in Associates and Joint ventures, and describes the application of the entity method to investments in joint ventures and associates.
The Group expects no impact form the adoption of this amendment on its financial statements.
IFRS 12 — Disclosures of Interest in Other Entities
The JASB, issued on 12th May 2011, “IFRS 12 Disclosures of Interests in Other Entities", effective (with retrospective application) for annual periods beginning on or after ist January 2013. These amendments were endorsed by EU Commission Regulation 1254/2012, 11th December, that allows a delayed on mandatory application for 1st January 2014.
The objective of this new standard is to require an entity to disclose information that enables users of its financial statements to evaluate: (2) the nature of, and risks associated with, its interests in other entities; and (b) the effects of those interests on its financial position, financial performance and cash flows.
IFRS 12 includes the disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, special vehicles and other off balance sheet vehicles.
The Group is yet assessing the full impact of the new IFRS 12 in line with the adoption of IFRS 10 and IFRS 11.
Investment Entities — Amendements to IFRS 10, IFRS12 and IAS 8 (issued by IASB on 31st October 2012)
The amendments apply to a particular class of business that qualify as investment entities. The TASB uses the term “investment entity” to refer to an entity whose business purpose is (o invest funds solely for returns from capital appreciation, investment income or both. An investment entity must also evaluate the performance of its investments on a fair value basis. Such entities could include private equity organisations, venture capital organisations, pension funds, sovereign wealth funds and other investment funds.
The amendments provide an exception to the consolidation requirements in IFRS 10 and require investment entities to measure particular subsidiaries at fair value through profit or loss, rather than consolidate them. The amendments also set out disclosure requirements for investment entities.
The amendments are effective from 1 January 2014 with early adoption permitted. This option allows investment entities to apply the Investment Entities amendinents at the same time they first apply the rest of IFRS 10.
The Group does not expect any major impact from the adoption of this amendment on its financial statements.
IAS 36 (Revised) — Recoverable Amount Disclosures for Non-Financial Assets
The TASB issued on 29th May 2013, this amendment, effective (with retrospective application) for annual periods beginning on or after Ist January 2014, These amendments were endorsed by EU Commission Regulation 1374/2013, 19th December.
The objective of the amendments is to clarify that the scope of the disclosures of information about the recoverable amount of assets, where that amount is based on fair value less costs of disposal, is limited to impaired assets.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 34 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
IAS 39 (Revised) — Novation of Derivatives and Continuation of Hedge Accounting
The IASB issued on 27th June 2013, this amendment, effective (with retrospective application) for annual periods beginning on or after Ist January 2014. These amendments were endorsed by EU Commission Regulation 1375/2013, 19th December.
The objective of the amendments is to provide relief in situations where a derivative, which has been designated as a hedging instrument, is novated from one counterparty to a central counterparty as a consequence of laws or regulations, Such a relief means that hedge accounting can continue irrespective of the novation which, without the amendment, would not be permitted.
563 Recently Issued pronouncements that are not yet effective for the Group IAS 19 (Revised) — Defined Benefit Plans: Employee Contributions
The IASB issued on 21th November 2013, this amendment, effective (with retrospective application) for annual periods beginning on or after 1st July 2014,
The Amendment clarifies the guidance on attributing employee or third party contributions linked to service and require entities to attribute the contributions linked to service in accordance with paragraph 70 of IAS 19 (2011). Therefore, such contributions are attributed using plan's contribution formula or on a straight line basis.
The amendment addresses the complexity by introducing a practical expedient that allows an entity to recognise employee or third party contributions linked to service that are independent of the number of years of service (for example a fixed percentage of salary), as a reduction in the service cost in the period in which the related service is rendered.
IFRIC 21 Levies
The IASB issued on 20th May 2013, this interpretation, effective (with retrospective application) for annual periods beginning on or after 1st January 2014.
IFRIC 21 defines a levy as an outflow from an entity imposed by a government in accordance with legislation. It confirms that an entity recognises a liability for a levy when — and only when — the triggering event specified in the legislation occurs. IFRIC 21 is not expected to have any effect on the Group's financial statements.
Improvements to IFRS (2010-2012)
The annual improvements cycle 2010-2012, issued by IASB on 12th December 2013, introduce amendments, with effective date on, or after, Ist July 2014, to the standards IFRS 2, IFRS 3, IFRS 8, IFRS 13, IAS16, IAS24 and IAS38.
IFRS 2 — definition of vesting condition
The amendment clarify the definition of 'vesting conditions' in Appendix A of IFRS 2 Share-based Payment by separate the definition of performance condition and service condition from the definition of vesting condition to make the description of each condition clear.
IFRS 3 — Accounting for contingent consideration in a business combination
The objective of this amendment is to clarify certain aspects of accounting for contingent consideration in a business combination, namely: classification of contingent consideration in a business combination and subsequent measurement, taking into account if such contingent consideration is a financial instrument or a non-financial asset or liability.
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ESPÍRITO SANTO FINANCIAL GROUP S.A, NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
IFRS 8 — Aggregation of operation segments and reconciliation of the total of the reportable segments! assets to entity's assets
The amendment clarify the criteria for aggregation of operating segments and requires entities to disclose those factors that are used to identify the entity's reportable segments when operating segments have been aggregated.
To achieve consistency, reconciliation of the total of the reportable seginents' assets to the entity's assets should be disclosed, if that amount is regularly provided to the chief operating decision maker.
IFRS 13 — Short-term receivables and payables
TASB amends the basis of conclusion in order to clarify that, by deleting IAS 39AG79, in applying IFRS 3, IASB did not intend to change the measurement requirements for short-term receivables and payables with no interest, that should be discount if such discount is material, noting that LAS 8.8 already permits entities not apply accounting polices set out in accordance with IFRSs when the effect of applying them is immaterial.
IAS 16 & IAS 38 — Revaluation method — proportionate restatement accumulated depreciation or amortization In order to clarify the calculation of the accumulated depreciation or amortization at the date of the revaluation, TASB amended paragraph 35 of LAS 16 and paragraph 80 of IAS 38 to clarify that: a) the determination of the accumulated depreciation (or amortization) does not depend on the selection of the valuation technique; and b) the accumulated depreciation (or amortization) is calculated as the difference between the gross and the net carrying amounts.
FAS 24 — Related Party Transactions — Key management personal services
In order to address the concems about the identification of key management personal (KMP) costs, when KMP services of the reporting entity are provided by entities (management entity e.g. in mutual funds), IASB clarifies that, the disclosure of the amounts incurred by the entity for the provision of KMP services that are provided by a separate management entity shall be disclosed but it is not necessary to present the information required in paragraph 17.
Improvements fo IFRS (2011-2013)
‘The annual improvements cycle 2011-2013, issued by IASB on 12th December 2013, introduce amendments, with effective date on, or after, 1st July 2014, to the standards IFRS 1, IFRS 3, IFRS 13 and LAS 40.
IFRS 1 — meaning of “effective IFRS” IASB clarifies that if a new IFRS is not yet mandatory but permits early application, that IFRS is permitted, but not required, to be applied in the entity’s first IFRS financial statements.
IFRS 3 — Scope exceptions for joint ventures
The amendment excludes the formation of all types of joint arrangements as defined in IFRS 11 Joint Arrangements from the scope of IFRS 3. The scope exception only applies to the financial statements of the joint venture or the joint operation itself.
IFRS 13 — Scope of paragraph 52 — portfolio exception
Paragraph 52 of IFRS 13 includes a scope exception for measuring the fair value of a group of financial assets and financial liabilities on a net basis. This is referred to as the portfolio exception. The objective of this amendment was to clarify that the portfolio exception applies to all contracts within the scope of IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments, regardless of whether they meet the definitions of financial assets or financial liabilities as defined in LAS 32 Financial Instruments: Presentation.
IAS 40— interrelationship with IFRS 3 when classify property as investment property or owner-occupied property The objective of this amendment was to clarify that judgment is needed to determine whether the acquisition of investment property is the acquisition of an asset, a group of assets or a business combination in the scope of IFRS 3 and that this judgment is based on the guidance in IFRS 3.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
IFRS 9 Financial instruments (issued in 2009 and revised in 2010)
IFRS 9 (2009) introduces new requirements for the classification and measurement of financial assets. IFRS 9 (2010) introduces additions relating to financial liabilities, IFRS 9 (2013) introduces the hedging requirements. The IASB currently has an active project of additional disclosures requirements limited amendments to the classification and measurement requirements of IFRS 9 and new requirements to address the impairment of financial assets.
The IFRS 9 (2009) requirements represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The standard contains two primary measurement categories for financial assets: amortised cost and fair value. A financial asset would be measured at amortised cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows, and the asset's contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding. All other financial assets would be measured at fair value. The standard eliminates the existing IAS 39 categories of held-to- maturity, available-for-sale and loans and receivables.
For an investment in an equity instrument that is not held for trading, the standard permits an irrevocable election, on initial recognition, on an individual share-by-share basis, to present all fair value changes from the investment in OCT, No amount recognised in OCI would ever be reclassified to profit or loss at a later date. However, dividends on such investments would be recognised in profit or loss, rather than OCI, unless they clearly represent a partial recovery of the cost of the investment.
Investments in equity instruments in respect of which an entity does not elect to present fair value changes in OCT would be measured at fair value with changes in fair value recognised in profit or loss.
The standard requires derivatives embedded in contracts with a host that is a financial asset in the scope of the standard not to be separated; instead, the hybrid financial instrument is assessed in its entirety for whether it should be measured at amortised cost or fair value.
IFRS 9 (2010) introduces a new requirement in respect of financial liabilities designated under the fair value option to generally present fair value changes that are attributable to the liability’s credit risk in OCI rather than in profit or loss. Apart from this change, IFRS 9 (2010) largely carries forward without substantive amendment the guidance on classification and measurement of financial liabilities from IAS 39.
IFRS 9 (2013) introduces new requirements for hedge accounting that align hedge accounting more closely with risk management. The requirements also establish a more principles-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting modef in TAS 39.
The mandatory effective date of IFRS 9 is not specified but will be determined when the outstanding phases are finalised.
The Group has started the process of evaluating the potential effect of this standard but is awaiting finalisation of the
limited amendments before the evaluation can be completed. Given the nature of the Group's operations, this standard is expected to have a pervasive impact on the Group's financial statements.
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ESPÍRITO SANTO FINANCIAL GROUP S.A. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2013 AND 2012 — (Continued) (Amounts expressed in thousands of euro, except when indicated)
NOTE 57 - SUBSEQUENT EVENTS
On 2 April 2014 ESFG sold its remaining 9.0% stake in Banco BEST to BES.
On 18 March 2014 ESFG announced that it had sold a 10.63% stake in Espírito Santo Saüde, as part of the healthcare company's IPO, launched on 6 February. The sale, which included the over-allotment option, leaves ESFG with a 3.38% direct stake in the company.
On 14 February 2014 ESFG announced the sale of its 44.8196 stake in BES Vénétie to BES.
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